Guest Commentary: Gutsy Japanese Stimulus Plans Target Yen, Nikkei

Unconventional government policies aimed at drivingJapan’s Nikkei Stock Index to 13,000 by the end of March could easily be catalysts for the yen’s future price movement.

Federal Reserve Chairman Ben Bernanke has occasionally been accused of “working for the stock market,” guiding controversial policy intended to push stock markets higher. Traditionally, Bernanke, as well as many other policymakers, refrain from talking about stock markets, as policymakers are widely expected to work for “Main Street,” not for Wall Street.

However, in Japan, things are different.Japan’s economic and fiscal policy minister,Akira Amari, has said that the government will step up economic recovery efforts so that the Nikkei Index jumps an additional 17%, to 13,000, by the end of March—the end of the Japanese fiscal year.

The rise in stock prices goes hand in hand with the weaker yen policy. A lower value of the yen increases future profits of exporters, thus pushing stock prices higher. Amari mentioned that the recent surge translates into combined share appraisal gains of some ¥38 trillion among domestic corporations. This, in turn, enables the companies to re-invest in the economy, an outcome that is the possible motivation behind his words. Setting a price target and timing, however, is more common among investment houses than policymakers.

Bernanke mentioned stock prices and home prices together when talking about a “wealth effect:” when consumers’ assets are larger thanks to an appreciation in the real estate or stock markets, which in turn leads to increased consumer confidence and spending. It is hard to believe that we will hear Bernanke or any US politician set a target for the stock market, and in other Western countries as well, this practice is uncommon.

The new Japanese government, however, has made quite a few uncommon policy decisions: 1) curbing the central bank’s independence; 2) announcing a stimulus act while the country is mired in tremendous debt; and 3) commenting so frequently about the exchange rate. The latest talk about the Nikkei Index just joins the long list.

Since the early 90’s, Japan’s economy has barely grown, and the country is suffering from deflation. The new policies made by Prime Minister Shinzo Abe’s government are certainly significant, but only time will tell whether efforts will succeed in navigating the yen and the Nikkei to favorable values.

In the meantime, it’s important to take note of these targets. The Japanese government has been successful in lowering the value of the yen, and also curbed the fall when it seemed politically wiser to do so. Towards the G-20 Summit in Moscow, Japanese officials said that the weakening of the yen had been “too swift.” The yen subsequently reacted and rose.

As there is an inverse correlation between the Japanese yen and the Nikkei, yen traders should watch out for the 13,000 target on the stock index; that could be a guide for the yen’s movements. Be advised, however, that USDJPY is not necessarily the easiest pair for trading. (See “The 5 Most Predictable Currency Pairs” on Forex Crunch.)

By Yohay Elam of Forex Crunch

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