Readers would be familiar with my yen-rate theory. I expected the weaker yen to signal less risk aversion, and hence a potential to move funds back into equities. The flight-to-safety play in 2008 didn't include gold. In fact, it was mostly concentrated in U.S. treasuries, the U.S. dollar and the Japanese yen.
The Japanese yen is down more than 10% since it peaked mid-December of last year. The yen has actually fallen below the levels seen at the height of credit anxiety during the October and November low points. However equities have not jumped as I expected. The yen typically rose with risk aversion as it did at the start of the collapse in mid-September of last year.The yen-dollar rate has scaled above 98 yen as write this.
Japan is more dependent on its exports for economic success than nearly any other nation. The global recession and the strengthening of Japan's currency has made it terribly difficult for its multinationals to sell products to the world. It does not seem that the Japanese government has done anything concerte to weaken the yen.
I believe that investors are beginning to take more risk with their money again. It's likely that the risk being taken is far more incremental. I see the initial move out of yen going to high-grade corporate bonds and maybe gold. It is still early days but its a good scenario for the willingness to move out of yen alone. There is a lot of liquidity on the sidelines, and there is only so much TIPs you can buy. Further improvements in the buying of corporate bonds will necessarily cause an inflow into equities.
Besides, Japan needs a weaker yen if the economy is going to be able to do its bit to improve its export-let economy. We don't need a paralysed Japanese economy. Sticking to the yen rate theory and gradually increasing equity weighting. Risk aversion may be abating, but the flow back into equities will be gradual and more gingerly in nature owing to uncertain markets.
p/s photo: Chen Kuang Yi