Same Motives, Different Tools
The basis for this conclusion stems from our world of competitive devaluation. Just as "amateurs talk tactics but pros talk logistics" in the military equation, we live in a world where amateur commentators still regard a strong currency as a sign of national virtue, while officials and politically powerful exporters angle for ever-weaker currencies.
When Japan declared war on the yen -- and no, that is not a typo -- in November 2012, it added its fuel to our QE3 fire. US equities returned almost 42% between November 2012 and January 2014, at which point the yen stopped weakening despite increasingly negative real interest rates in Japan.
Part of the reason (and one certainly suggested by superimposing a line on January 2, 2014) was the reversal in the yen/yuan cross-rate. China was struggling with slowing growth and has always regarded Japan's acquiescence to calls for a stronger yen in the 1980s as the beginning of the end for its island neighbor.
The engineered downturn in the yuan was effectively achieved by selling yuan for other currencies and watching those stronger currencies turn into purchases of US Treasuries. As I noted in March, the weaker yuan was more than offsetting the Federal Reserve's tapering. This shows up very clearly when we map the yen/yuan cross-rate against 10-year Treasury yields.
To review the bidding, a weaker Japanese yen helped push stocks higher, and a weaker Chinese yuan against both the yen and the dollar helped push Treasury yields lower and the yen higher. Now let's stipulate that the Japanese aren't the sort to let their currency appreciate without them having something to say about such an outrage. If Japan wants to arrest the yen's rise, offset the effects of its fiscally contractionary consumption tax, and try one more time to reverse its long-running deflationary pressures, it will have to print more yen and hope someone, somewhere borrows them.
Those borrowers are likely to be non-Japanese for the very good reason that this has been their experience since 1999. Slack credit demand in Japan and the willingness of non-Japanese borrowers to engage in a yen carry trade can weaken the yen but do little for Japan's domestic well-being. What are overseas borrowers going to do with those yen -- lend them into 10-year Treasuries with a real return hovering around 0.33%? No, if you're going to go through the trouble of undertaking a yen carry trade, go the whole route and step out along the risk curve into equities and higher-yielding bonds.
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