Changes in Japan impact financial markets

Allen Wisniewski

Last week was a good example of how international developments can impact our financial markets. Oftentimes news stories from across the world are interpreted in a negative light. This time what took place in Japan was taken to be positive.

Essentially what took place was Japan’s central bank and its government pension plan will make massive purchases in government securities and stocks. This move was taken to stimulate the economy in Japan, which has been stagnant for many years. This move led to the Japanese market jumping nearly 5 percent in one day, with European markets increasing about 2 percent afterwards. Our stock market rose over 1 percent that day, after already being strong earlier in the week.

This move also had a major impact in the currency markets, as the U.S. dollar strengthened significantly against the Japanese Yen. The dollar also increased in strength against the Euro on speculation that the European Central Bank might make similar moves.

It should be noted that the U.S. dollar has been gaining in strength in recent months. This move in Japan was more a continuation of previous actions, but certainly was significant enough to give a jolt to the financial markets.

A stronger dollar is a major positive for U.S. consumers. The stronger dollar has been one of the contributors to the price of oil coming down, which significantly impacts the price of gasoline. Increased U.S. production of oil also has been a factor in lowering gasoline prices.

Another key industry impacted by a stronger dollar would be autos. A stronger dollar makes it easier for imported cars to be priced lower, which lessens the pricing power of domestic vehicles. Many foreign manufacturers do have plants in the U.S. now, so the impact isn’t as great, as it was previously when the dollar strengthened. Still, many parts are sourced overseas, so the stronger dollar lowers costs.

Another interesting development has been the impact on Russia with a stronger dollar. Russia is a major energy producer, so its economy is impacted in a significant manner when oil prices are falling. With less oil revenue coming into the country, it makes it more difficult for Russia to fund its military. A recent easing of tensions in Ukraine has helped to reduce global risk.

While Japan’s central bank has increased its purchase of government securities, our Federal Reserve has just announced that they have completed their purchases. The move by the Federal Reserve was expected, but it does make the point that our economy is performing significantly better versus Japan and also Europe at the present time.

One problem in Japan is that their fiscal and monetary policies are moving in opposite directions. They increased their national sales tax from 5 percent to 8 percent earlier this year, and that has had a depressing effect on their economy. In addition Japan’s sales tax is scheduled to rise to 10 percent next year, but it may be delayed because of their sluggish economy.

The moves Japan instituted last week, at the margin, will help their economy somewhat. However, Japan despite the high educational attainment of its population, needs a more open economy to better realize its full potential.

We have seen our market recover strongly in recent weeks, back to its old highs. Part of this recovery has been because of international news. The monetary stimulus from Japan, and an easing of tensions in Ukraine being two positives.

Because the U.S. is currently performing better than much of the rest of the world, our stock market and currency have done better versus global averages this year. However, our stock market is relatively more expensive. Therefore, I still believe it is appropriate that investors maintain some international representation, as global economies will eventually recover.

Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.

Changes in Japan impact financial markets