How to Play the Impending Yen Depreciation

 | Jan 09, 2013 | 5:00 PM EST  | Comments
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Last week, I wrote about the the incoming Japanese government and its plans to force the Bank of Japan to directly monetize the issuance of new Japanese Government Bonds (JGBs). Regardless of whether the government actually succeeds in this, it is beginning to become clear that the BOJ is responding to political pressure that's demanding it stimulate the economy with much more aggressive monetary measures.

If the BOJ does implement this strategy, it will essentially and in actuality adopt the nominal gross domestic product (NGDP) targeting system of monetary policy. Over the past few years, this has been widely discussed as a potential route for the U.S. Federal Reserve and for the European Central Bank, as well.

If the BOJ does this and the Fed and ECB do not respond in kind -- with competitive depreciations of their own -- the result should be a yen depreciating against the dollar and a steadily rising euro. A depreciating yen, in turn, would set the stage for an increase in Japanese exports -- because, outside of Japan, their pricing would decline in comparison with that of goods produced elsewhere.

The Nikkei 225 Index ETF (NKY) has already rallied 22% in the past two months on this very expectation.

In keeping with the idea that a rising tide lifts all boats, know that the push provided by a depreciating yen may benefit two large Japanese companies that have been beaten down over the past several years. These names are Sony (SNE) and Panasonic (PC). Both are trading near all-time lows, and each stock is well below the lows from the 2008-to-2009 crisis.

Sony, recently quoted at $10.72, is currently up a little more than $1 from last month's near-term low of $9.63. Its 2008-2009 crisis low was $16.60, and the last time it had been priced in the $10 range had been in 1987.

Panasonic, recently at $5.92, is up about 28% from its near-term low of $4.63, which it hit a few months ago. Its crisis low was $10.87 and, before this, the last time it had been priced in the $5 range had been in 1985.

Although the market capitalization of both companies is dwarfed by firms such as Toyota (TM) and Honda (HMC), Panasonic and Sony are bellwether names in Japan with market caps in excess of $10 billion each. Further, each has survived since its respective foundings in 1918 and 1958. Panasonic has about 320,000 full-time employees, as many as Toyota does. Sony, meanwhile, employs almost as many people as Honda does, with 170,000 workers vs. about 187,000 at Honda.

Furthermore, the failure of either company would be detrimental to the Japanese economy, as well as to the psyche of the Japanese people. So, if such an event became widely anticipated, the Japanese government would likely provide capital in order to prevent that outcome.

Although both companies have negative net incomes, a depreciating yen will probably cause their sales to rise as they gain pricing power -- especially against their Korean competitors and dominant flat-screen makers LG Display (LGL) and Samsung.  

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