Here’s the easiest trade to make in the history of Earth:
Buy Japan. Sell Europe.
The reasons have nothing to do with fundamentals, and everything to do with the strategic thinking behind policy.
The new head of the Bank of Japan, Haruhiko Kuroda, is determined to end the generation of deflation that has devastated his country’s economy like Godzilla plundering paper Tokyo.
Once his predecessor leaves the job on March 19, a few weeks from now, Kuroda will embark on an unprecedented program of yen easing. He will be buying assets with a view toward weakening the yen and creating inflation. He will be increasing the yen supply drastically.
Inflation, you see, is not an altogether bad thing. When prices go up producers get more, which means they can spend more. And consumers are encouraged to spend more because as the prices are going up, the value of what’s in their pocket is going down. Inflation, in limited degrees – and Kuroda’s target is just an inflation rate of 2%, about the US rate – actually stimulates growth. It encourages people to go into their mattresses and buy assets, and it encourages corporations to break into their cash hoards and invest.
It’s stimulus. It’s not as good as the stimulus you get from actually spending government money, but it’s stimulus. That means the value of the yen goes down, but the value of Japan’s economy goes up. It means Japan is going to start growing again.
Don’t Bet On US, Either
Contrast that with the policy in Europe, which is being run by Germany.
There you have both fiscal and monetary drag. Governments are being told to spend less, to tax more, which means they can’t grow. And the supply of Euros is being kept in check with super-low interest rates at the center, in Germany. The only game available to traders is speculating, back-and-forth, on policies at the periphery, in Italy and Spain and Ireland. You sell them as austerity deepens, you buy them as austerity relents. It’s not a fun game, because it’s not a fun place to hold assets these days.