The appointment of Kazumasa Iwata as BoJ governor would signal that the BoJ is committed to transform the Japanese monetary policy with a view of weakening yen and generating inflation
In the latest issue of GREED & Fear by CLSA, Christopher Wood discusses Japan’s financial woes. He starts off the discussion talking about the current account surplus generated by the PIIGS countries. They have surprisingly recorded an aggregate surplus of 7.2 billion euros in the third quarter of 2012, their first aggregate surplus since Q3 of 1999. However, Chris Wood says the surplus is due to collapsing domestic demands rather than increasing exports.
Therefore, Eurozone’s overall current account surplus is also rising, this demonstrates the continued resilience of euro. But it will pose problems for German companies competing directly against Japanese firms, as the euro has appreciated 22 percent against yen since July 2012.
Coming to our issue of Japan, finance minister, Taro Aso, announced this week that the struggling Asian economy will use its foreign exchange reserves to purchase bonds by by the European Stability Mechanism (ESM). Chris Wood doesn’t find it a market moving event for the yen. He goes back to a proposal made by a favored Bank of Japan governor candidate, Kazumasa Iwata, to purchase 50 trillion yen worth of European government bonds. That would be a positive sign for yen.
Last month, GREED & Fear heard in Tokyo that Kazumasa Iwata is the candidate most likely to become the governor of Bank of Japan in April 2013. His appointment would signal that the BoJ is committed to transform the Japanese monetary policy with a view of weakening the yen and creating an inflation.
The yen has now weakened to 87-88 range against the U.S. dollar. GREED & Fear wonders if the corporate Japan is tempted to lock in the profits on the declining yen by placing the new hedge positions.
The future of Japanese monetary policy would depend on who becomes the next Bank of Japan governor. If Iwata really becomes the governor, then investors will continue with short yen/long Japanese equity. That’s exactly what Jeffrey Gundlach had recommended last month. Chris Wood said he will stick to the tactical overweight Japan view for the time being. Meanwhile, the yield on super-long 20-year Japanese government bonds has increased 28 basis points from its lowest level in July 2012 to 1.8 percent.