So, the yen is up slightly after Mr. Noda’s last suggestion of US$100bn to support overseas acquisitions for Japanese companies. Some commentators called it “underwhelming” and honestly, 7.7 tn yen isn’t that much. Asking financial institutions to disclose currency positions is also unlikely to do much.
All in all, however, this may be some of the best long term news out of Japan for a long time. Here’s why.
It represents a strong shift of mentality of the officials, and an acknowledgement that there are other things than currency intervention that might be valid policy responses to a strong yen. Noda himself has been out saying that there are upshots to a strong yen, and now he proved that he believes in it enough to foster policy that follows his mouth. Noda for Prime Minister, I’d say.
The suggestion that overseas acquisitions may help the Japanese companies and diminish some of the effects of a stronger yen could be a new renaissance for both the currency policy and Japanese business. Allow me to dream for a while:
- Cash in business coffers could actually be used to produce growth. This is a “Heureka!”-level moment.
- A reallocation of assets could cause strong outflows of yen being traded to other currencies, forcing weakening of the yen and benefitting both current exporters and those that subscribe to the program. This in turn could create a positive spiral that adjusts after repatriated corporate earnings offset the outflow, allowing the economy to make a positive structural and earnings transition.
- If the BOJ still keeps the interest rate this low, and with 2. being in effect, that could be the carry trade of a lifetime, further enforcing 2.
- Together with supply chain management which is in vogue now after the March 11 earthquake, this could be a great enabler for foreign excursions on the part of domestic businesses. It could be a great momentum trade on the part of Mr. Noda.
- If we’re on the topic of dreaming big, Mr. Noda, why not say goodbye to that costly, resource-draining exercise of currency intervention if your country economy is taking care of it on its own, and take care of some pressing matters on your home ground?
In summary, if this could breathe some life into the Japanese business sector, if it’s the the start of a new policy tone, Japan might just turn the tables of what it means for markets to “turn Japanese“. And they would do it right back at the people in the west who pull that term out like “bitten by zombie”.