In 450 words...
In the recently published notes, "Japan - Central Banks and the yen carry-trade" and "Indispensable yen", I argued that the country's weak currency was everyone's problem...
....and more specifically an American problem because, borrowed at very low interest rate, yens converted in dollars (mainly) and euros found their way in supporting the U.S. equity and bond markets for profitable return
If the window of low-cost loans closes in Japan, this most important well of global liquidity will quickly be running dry
The U.S. Federal Reserve has a vested interest in 'slow-walking' the tide of financial liquidity departing from U.S. markets by supporting of the Yen / $ rate and the Bank of Japan (BoJ)'s cautious (and necessary) rate increases
Japan's vast economic influence across South-East Asia and globally makes its weak currency all the stranger, and there is more to the story than just monumental indebtedness....
While it is hard to figure how this game of chicken between currency traders and Central Banks will play out, the main parties at risk, the new Japanese government and both the U.S. Federal Reserve and the BoJ, will err on the side of prudence, seeking to balance debt reimbursements and new Japanese public debt (resulting from campaign promises) with support of the currency and of the bond market ...
Critically dependent on energy imports, Japan is likely to intervene forcefully in currency markets to combat any further Yen weakness, as the U.S.-Iran war unfolds, to constrain the inflationary impact of steep oil price rises
10-year Japanese Government Bond yields are approaching levels last seen in the mid-1990s
As discussed in "Central Banks and the Yen carry-trade", rising interest rates, and a rising Yen priced in U.S. dollar, will tighten global liquidity (by squeezing the carry-trade)
Still, Japan's monetary policy might succeed in regaining control over its currency with the implicit support of US (as well as Chinese) central banks...tired of Japan's industrial export drive, boosted by the perennial low currency value
Because of Japan's sizable public debt and poor demographics, rising interest rates will inevitably have a significant impact on the country's budgetary projections for 2026/2027
The challenge is Japan's to overcome but the country stands tall as a manufacturing giant, less favorable currency exchange notwithstanding ....
At face value, the Tokyo stock market, extensively covered on Pininvest, attests of great strength in robotics, semiconductors, precision machinery, chemicals, automotive, shipbuilding, healthcare and ubiquitous conglomerates
- 25 Largest Market Cap listings on U.S. Markets
- Large Cap Listings on U.S. Markets -$10 bn to $45 bn
- Japan Financials - Large Banks and Investment Companies
- Japanese Companies all U.S. listings
- Japan ETFs
In plain sight stands a feature which surely is the envy of developed economies so inconsiderate as to entrust the production of critical industrial goods to China's exporters
Japanese industrial supply chains will be discussed in my follow-up report
Backbone of the very considerable global influence of Japan, investors should be mindful to appreciate the Japanese manufacturing and financial behemoths, if portfolio diversification tops their agendas...