The Japan Investor:
As we mentioned last week, the QE2 event has now been so hyped that it has probably become a "sell on the news" event, which causes a short-term rally in USD, a back-up in US treasury yields, and profit-taking in stocks (around 10%) as well as commodities and even gold. However, as the Fed is expected to remain committed to going where monetary policy has never gone before until US employment recovers, QE2 will eventually push USD and treasury yields even lower, and push investors even further into risk trades.
After much wailing and gnashing of teeth, Japanese companies are beginning to believe that nothing can be done to keep the yen from surging past the 1995 against USD, to JPY70/USD or beyond. The more enlightened of them, such as Toshiba, were already implementing plans to restructure their operations to be able to neutralize the strong yen's impact. Toshiba for example intends to restructure their business to withstand JPY70/USD exchange rates._
Over the short-term, this is bad news for companies down the food chain that supply these major corporations, as the majors will be moving even more production overseas as well as shifting procurement to overseas suppliers. To survive, companies down the food chain will either have to supplement this lost business with new, foreign customers, and/or also move their operations offshore.
As far as stock prices of the major Japanese automobile and electronic manufacturers are concerned, the damage has already been done, as stock prices have been falling even faster than earnings and returns on capital employed for the past decade as growth expectations are completely wrung out of stock prices. In this regard, these stocks are now cyclical, marginal trading plays rather than core long-term holdings in foreign investor portfolios. There are no Apples or Googles here. If you want to leverage the yen's strength, buy a JGB instead of a Japanese company in the electronics or automobile sectors as long as, a) the Fed is committed to QE2, and/or until these companies learn to embrace JPY70/USD or higher.
