Bloomberg Businessweek - USA (2019-06-10)

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THEBOTTOMLINE Japan’ssuperlowinterestrateshavemade

it a less attractive place to park cash, and Japanese investors are

looking for more ways to earn money abroad.

● Global investors still consider Japan a safe

haven, but the trade isn’t paying off like it used to

It’s Tougher to Make

A Buck on the Yen

On the morning of Friday, May 31, when traders in

Asia starting their day were surprised by President

Trump’s move to impose tariffs on Mexico, there

wasa seeminglyobviouscourse:Rushintotheyen.

BuyingJapanesecurrencywhentheworldlooks

wobblyis a classictrade.Japan’scurrent-account

surplus means it doesn’t need to borrow from any-

body. Investors, including those in Japan who have

accumulated overseas assets, are confident about

parking money in Japanese bank deposits or gov-

ernment bills when they want to ride out a storm.

That, in turn, is good for the value of yen. And

going into yen is an easy trade to make: Dollar-yen

is the world’s second-most-traded currency pair.

But this textbook move isn’t working quite as

well as it used to. In the first 30 minutes of trading

callsfromchampionsofeconomicorthodoxy,such

asLarrySummersandOlivierBlanchard,forcloser

cooperationbetweenthepoliticianswhodrawup

budgetsandthecentralbankerswhosetinter-

estrates?Thatwasoncea kindoftaboo.Senator

MarcoRubio,a FloridaRepublican,hasevenpub-

lisheda whitepaperrippingshareholdercapital-

ism.Thatethos,whichsayscompaniesshouldact

tomaximizereturntoinvestors,hasbeendomi-

nantfordecades.ButRubiosaysit “reducesinvest-

mentinresearchandinnovation,andundervalues

Americanworkers’contribution.”

If investorshavea naggingsensethatallthese

problemswillgetaddressedonewayoranother

andthatbusinessmodelswilllikelybeupendedin

theprocess,BetterMarkets’Kellehersaysthey’re

right.Hepredictsthe 2020 outcomewillhingeon

whocantapintotheinsecuritieseatingawayat

Americancapitalism.“TheviewonMainStreet

rightnowistheeconomicandpoliticalsystem

worksforthewell-connected—epitomizedbythe

lordsofWallStreet,”hesays.“Therearetectonic

shiftsgoingoninthiscountry.”�CraigTorres

THE BOTTOM LINE With GOP politicians questioning shareholder

capitalism and Democrats talking about sweeping reforms,

investors are paying close attention to elections earlier than usual.

that Friday, as futures on the S&P 500 index of

stocks fell 1%, the yen advanced only 0.2%. It took

additional protectionist trade rumblings from China

later in the day before the yen recorded a 1.2% rise.

That modest-looking daily move turned out to

be the biggest gain for the yen in two years. It’s

a notable contrast from the past, when Japan’s

currency could make a move that big—or bigger—

in minutes. (For example, when the U.K.’s Brexit

vote became apparent on a Friday in June 2016, the

yen leapt as much as 7.2% against the dollar.) “This

morning’s news was shocking—suddenly Trump

imposes tariffs on Mexico—so, a new agenda for

themarket,”asTohruSasaki,headofJapanmar-

ketsresearchatJPMorganChase& Co.,putit.The

dollar-yen should have responded immediately.

“This is a kind of structural change.”

Indeed, as Trump slapped tariffs on China in

May, the yen proved the best-performing major

currency. But take a step back, and it’s barely up

this year, with a dollar buying 108.09 yen on June 4,

compared with 109.69 at the start of the year. Sasaki

says a few things have changed. First is the wide-

spread recognition in Japan that its central bank

is still a long way from even contemplating nor-

malizing monetary policy after an extended period

with interest rates at zero. That means Japanese

institutional investors have had to send much of

their money abroad to earn a positive return, help-

ing to boost demand for other currencies relative

to yen. “It’s a minor version of capital flight. It’s

not that people don’t think it’s safe to keep money

domestically, it’s that they think there is no return

in Japan,” Sasaki says.

Japanese companies’ behavior is another consid-

eration. They announced more than 1,000 offshore

acquisitions last year, totaling a record $191 billion.

Takeovers run the gamut from makers of pasta

sauce and beer to banks and pharmaceutical com-

panies. Businesses want to increase the external

share of their revenue as Japan’s population shrinks.

Strong demand for dollars and other foreign cur-

rencies means traders are happy to “buy the dip”

in the dollar-vs.-yen whenever they see a move to

Japan’s currency as part of safe-haven trade. That

slows the fall of the dollar and cuts off some of the

yen’s gain. “I think the flow into yen as a safe haven

remains,” says Jane Foley, head of currency strat-

egy at Rabobank International in London. “But for

us to see it go down to, say, 105, you’ll need to see a

major geopolitical shock happen.” �Chris Anstey

and Ruth Carson

6/1/18 5/31/19

5%

0

-5

-1 0

● Percentagechange

sinceJune1, 2018

Yen’svaluein

U.S.dollars

S&P 500

DATA: COMPILED BY BLOOMBERG

◼ FINANCE Bloomberg Businessweek JuneJune 10, 2019