Arrow Dynamics or Yen-gineering?

Much has been made throughout 2013 about the three “arrows” of Japanese Prime Minister Shinzo Abe. While this deflation-fighting plan of monetary loosening, fiscal stimulus, and structural reforms has been broadly successful, I believe it will be the strength or weakness of the yen that will determine whether Japan’s economy emerges convincingly from its deflationary period in 2014.

For two decades, the greatest foe of Japanese industry was an overvalued yen. Exporting has long been a primary driver of Japan’s economy, and the relative strength of the yen (especially versus the U.S. dollar) has dampened a good deal of potential success. Japan has excelled at manufacturing products that U.S. consumers like and can afford: cars, high-end electronics, appliances, etc. And the strong yen has made those products more expensive. A strong yen is probably one of the main reasons that Japan was essentially left out of the biggest tech trends of the last twenty years – mobile phones and smart phones. Apple battles it out with South Korea’s Samsung rather than a Japanese tech company, though even Apple’s ascendancy also likely stands on the shoulders of a too-strong yen.

And while the yen has backed off its highs, I find it hard to fathom how Japan will decisively pull out of its deflationary period without the yen moving lower still. For Japanese industry to compete globally, the real value of the yen needs to decline. In discussions with other asset managers, I’ve heard estimates that the yen could decline to ¥120 against the U.S. dollar. And if that’s the case, then one would have to be very optimistic about Japanese industry. In 2014, tapering of the Federal Reserve’s quantitative easing program combined, potentially, with more monetary easing from the Bank of Japan could help the yen get to those levels. Though, if for whatever reason, Japan is not able to get their currency to these levels, I think that’s where the risks will be.


The information in this article has been derived from sources believed to be accurate.  Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity.

The information in this article contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice.

Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions in this article.

Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided.