Japan's New Kamikaze Central Banker and the Nikkei's Awakening

“There are a lot of voices in the business world saying that the dollar around Y95 is appropriate in terms of trade…in cooperation with the Bank of Japan, I will make efforts to…bring the exchange rate to appropriate levels.”

– New Japanese Finance Minister, January 7th 2010

Ignore Japan’s new central banker at your own risk, because he’s on a mission to blow up the Yen.

This is a developing story and I am hardly an expert on Japanese stocks, but I have to believe that Japanese bankers have taken notice of the weak dollar-led recovery in US asset prices and may want to make moves of their own.

By now, most market players are keenly aware of the dollar’s current (mostly inverse) relationship to stock prices.  They should also consider that the Yen makes up about 13.5% of the US Dollar Index (USDX), nowhere near the weighting of the Euro cross (58%) but more significant than any of the other currencies.

Below is the Nikkei 225 index over the last 40 years:

The Nikkei is currently selling at a 75% discount to its 1989 high (38,000) and the country is desperate to avoid another dip as well as to stop the deflationary cycle and put an end to its two Lost Decades.  The strategy, according to new Finance Minister (and deputy PM) Naoto Kan, is an orchestrated debasing of the Yen.  This will help inflate assets and, more importantly, get exports going via more competitive pricing.

Kan stepped in to the role yesterday when his predecessor stepped away for health reasons; he is the sixth Japanese finance minister since August 2008.

Unlike our disingenuous Treasury officials, who pretend to stand for a strong dollar, Kan has spent his first day on the job publicly stating he’d like a weaker Yen.

Japanese stocks just took out a 15 month high on Kan’s opening remarks as Japanese analysts expressed their bullishness:

“Upward momentum for Japanese stocks is becoming apparent and that will likely continue, due to a recovery in the global economy, the weaker yen and receding worries about equity financing by banks,” said Hiroichi Nishi, general manager of equity marketing at Nikko Cordial Securities.

The Nikkei is currently trading at around 10,800.  Veteran strategist Byron Wien included a developed world-beating Japanese market as one of his 10 surprise predictions for 2010:

Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000.

To be sure, Japan has its work cut out for it due to many factors including debt levels and demographics, but betting against a central banker (in the short-term) who has a mandate to reflate asset prices is not my cup of tea.

I will begin monitoring the Nikkei 225 on a daily basis and relearning its components.  I suspect that many investors around the globe will be doing the same.

Here’s some stuff to read on this topic:

Kan Is Named Japan Finance Minister, Replacing Fujii (BusinessWeek)

Blackstone Group’s Byron Wien Announces Top Ten Surprises for 2010 (PR-Inside)

Nikkei set to extend rise on yen, eyes on new finmin (Reuters)

New Japan Fin Min Kan Prompts Yen Fall With FX Remarks (Nasdaq.com)