“I am confused. In today's audio you mention that the weaker yen is a cause of a stronger Nikkei. But that the weakening rupiah puts further pressure on the Indonesian stock market. Why the difference?”
Eoin Treacy's view Thank
you for this question which highlights the unique situation Japan is in as it
attempts to break out of a decades-long deflationary cycle. By early 2012, the
strength of the Yen was identified as a national liability and the new administration
of Shinzo Abe embarked on a bold mission to reinvigorate the economy.
Appointing a friendly central banker and devaluing the Yen were the first steps in what needs to be a broad spectrum approach to the country's not inconsiderable challenges. Adopting an outright inflationary bias is aimed at forcing corporations and consumers to speed up purchasing decisions and hence kick start the economy. The weakness of the currency will have obvious merits for the export sector, consolidating foreign earnings in Yen, as well as for their competitive position with international adversaries. At Fullermoney we have advocated a hedged approach for anyone interested in participating in the concomitant reflation of the stock market that is taking place.
In other markets, such as Indonesia, where a current account deficit is putting pressure on the currency and where interest rate hikes are likely to result in slower economic growth, foreign investors are taking a cautious approach and withdrawing funds until they have some visibility on how weak the currency is likely to get. This represents a headwind for the stock market at least for the moment. Of course the corollary is that once the currency has stopped falling, the benefits for a country's exporters and the competitive edge for the economy will generally lure foreign investors back in.