Since coming to power in December 2013, Japanese prime minister Shinzo Abe has advocated a string of aggressive policy measures, dubbed Abenomics, to bolster the economy, stoke inflation, and improve global competitiveness via a weaker yen.
Abenomics for a long time was successful in depressing the yen. It went from about 82 yen to a dollar in December 2012, to 105.3 yen to a dollar in January 2014.
Year-to-date however the U.S. dollar is down 3.7% against the yen.
Richard Bernstein, CEO of Richard Bernstein Advisors, thinks the only real story in Japan is the yen.
“The competitive advantage has been whittled away through demographics, through productivity, through better competitiveness in other emerging market,” Bernstein said at a breakfast earlier today. “What’s left is currency. If you have no competitive advantage, this is true of every country, how do you compete? You compete on price.”
Bernstein dubbed Japan’s strategy, the Walmart strategy. Walmart he explained uses cheap prices to gain market share, and that was the story in Japan for a year and a half. But the yen has now started to appreciate.
“Think about what would happen to Walmart’s stock price if it started raising prices,” he said. “They’d have no competitive advantage. This is a market share game for them. So look what happened, the yen started appreciating — Walmart raising prices — and the Nikkei goes down, that’s it. That’s all you have to know.”
Bernstein said back in the 1980s there was little correlation between the yen and the stock market, but that changed.
“The one arrow, two arrow, three arrow, four arrow stuff is great politics, but I don’t think it makes any difference,” he said.
Bernstein was making reference to the names of various parts of Abenomics. Arrow one, is a fiscal stimulus, arrow two involves aggressive monetary easing, and arrow three drives structural reforms driven at improving economic competitiveness.
While Bernstein does think the other arrows will bring back the competitive advantage eventually, he doesn’t think it will do much for profitability or stocks in the next 12 to 15 months.
He also said that the Bank of Japan doesn’t realise that the odds are stacked against them because whenever there’s a problem in emerging markets, the yen is seen as a safe haven, which causes it to strengthen.
“In the next 12-24 months as an investor you just want to look at the yen. That will tell you the whole story for Japan,” he said. “It’s just Walmart, that’s all there is.”