LONDON – Japanese are pouring money into investment trusts at the fastest pace in almost two years, supporting government officials’ assertion to their Group of 20 peers that policies weakening the yen will boost global growth.
Data from the Japanese Investment Trusts Association show that net new investments increased last month at their fastest pace since May 2011. With 38 percent of those funds’ assets held overseas, the consequence may be an appreciation of currencies that typically gain the most when the pace of economic expansion accelerates.
The G-20 signaled last week that Japan has scope to keep stimulating its economy as long as policymakers don’t actively pursue a decline in the yen, the worst-performing major currency this year. The yen’s slide is spurring analysts to increase their forecasts for Japanese growth, and Finance Minister Taro Aso said last week a stronger Japan would “have a positive impact” on the global economy.
“Japan is putting in place very stimulative monetary policy,” Ian Stannard, head of European foreign exchange strategy at Morgan Stanley in London, said Feb. 14. “This should be seen as a positive for risk appetite given the amount of liquidity which is going to become available for international investment.”
The yen has depreciated 7.3 percent against the dollar since the beginning of the year. It’s been sliding after Prime Minister Shinzo Abe pushed for greater monetary stimulus that tends to debase the currency since he took office in December, attempting to rid Japan of 15 years of deflation. The yen was at ¥94.46 on Feb. 11, the lowest since May 2010.
In the past year, the yen declined 16 percent, the worst performer among 10 major currencies tracked by Bloomberg Correlation Weighted Indexes, with the Australian dollar the second-worst, dropping 3.3 percent.
Exchange rate depreciation has already boosted corporate profits, Abe told the Diet on Feb. 12, citing a survey of more than 1,000 companies. The Nikkei has rallied 20 percent in the past year, versus a 12 percent gain for the Standard & Poor’s 500 Index.
Data from the Japanese Investment Trusts Association show net new investments increased by ¥663 billion in January. Total foreign assets in the funds increased to ¥25.7 trillion, the most since August 2011, representing 38 percent of the total amount.
The demand for investment overseas is picking up, according to Derek Halpenny, the European head of global-markets research at Bank of Tokyo-Mitsubishi UFJ.
“The equity impact within Japan, which helps lift Japanese households’ investor sentiment, could encourage investments into foreign markets,” Halpenny said Monday. “There is tentative evidence of this.”
The economy unexpectedly shrank an annualized 0.4 percent last quarter, bolstering Abe’s case for more stimulus.
The Bank of Japan said Jan. 22 it will conduct open-ended asset purchases starting next January, buying ¥13 trillion a month, while setting a 2 percent inflation target.
Abe will choose a new governor for the BOJ as soon as next week as he seeks greater action to jump-start an economy in which prices haven’t risen since 2008.
The measures are boosting analyst expectations for Japan’s economy, with those in a Bloomberg survey forecasting it will grow 0.95 percent this year, up from 0.65 percent as recently as Jan. 9. The International Monetary Fund said in a Jan. 23 report that Japan’s stimulus plans will help increase growth in the near term.
Policymakers at the G-20 meeting in Moscow last weekend signaled Japan has scope to keep stimulating its economy as long as officials cease publicly advocating a sliding exchange rate.
“What there is, is a debate going on about the deployment of monetary policy across a number of developed economies,” Australian Treasurer Wayne Swan told reporters Friday in Moscow. “In so far as that monetary policy is directed toward getting stronger growth in the domestic economy, that’s a good thing for the global economy.”
South Korea denied Tuesday that the G-20 nations endorsed Japan’s quantitative easing. The group “didn’t officially oppose Japan’s policies, but the topic was very controversial,” Choi Hee Nam, a director general at the finance ministry, said at a briefing in Sejong.
IMF data show South Korea is the second-most important export competitor to Japan. The yen weakened 5.9 percent against the Korean won this year. Royal Bank of Canada analysts estimate a 1 percent decline in the yen versus the won leads to a 0.3 percent drop in South Korea’s export volumes.
“I’m not convinced that a weaker yen is going to lead to greater global demand,” said Raghav Subbarao, a foreign exchange strategist at Barclays in London. “If there’s a substitution towards Japanese products, that’s likely to come at the cost of other products — for example, Korean exports — without necessarily leading to an increase in aggregate demand globally.”
BOJ Gov. Masaaki Shirakawa said Saturday that the G-20 statement was “absolutely in the same spirit as our monetary policy.”
“There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue,” said Brazilian Finance Minister Guido Mantega, who popularized the term “currency war” in 2010.
An outflow from Japan has already started with purchases of European sovereign bonds, according to SEB AB’s head of Asia strategy, Sean Yokota. The largest share of investor cash was probably steered toward equity funds in January, while Brazilian bonds were also in demand, he wrote in an investor report Tuesday.
The performance of Japan’s equities may delay outflows, Singapore-based Yokota wrote.
Increased liquidity expectations in Japan are also boosting the appeal of emerging markets as investors are more prepared to invest in assets perceived to be higher risk, enticed by the prospect of higher returns amid an improving outlook for growth.
The Brazilian real appreciated 13 percent versus the yen since the beginning of the year, while the Mexican peso climbed 9.8 percent and the Turkish lira gained 8.3 percent.
“Investor flows to emerging markets tend to benefit” when the yen is falling versus the dollar, based on the past seven years of data, said Nick Chamie, a foreign exchange strategist at RBC in Toronto. “Generally the commodity exporters should benefit the most, like India and Indonesia, those that would be suppliers into Japan’s industrial complex, as well as Australia and China.”