The impact of central banks around the globe instituting quantitative easing (QE) programs has resulted in a race to the bottom for country currencies. Japan is the latest country to announce and implement an expanded QE program. Earlier this year the Bank of Japan (BoJ) announced that it would spend an additional $155 billion on stimulus projects a month on top of a of the current stimulus of $410 billion. The impact on the Yen has been to weaken it. For Japanese investors, they can buy U.S. Dollar denominated investments and as the Yen weakens relative to the U.S. Dollar, get enhanced returns when converting the Dollars back to Yen.
One attractive area for foreign investors has been the corporate bond market. As the below chart of the iShares Total Core Bond ETF (AGG) shows, since November 1, 2012, the AGG has returned a negative 1%. The return of AGG in Yen though translates into a return of over 21%.
For a U.S. investor who invests in the Nikkei, the strong Dollar/weak Yen can work in reverse. Although the Nikkei is up almost 50% since November of last year, when converting those returns back to Dollars, the Nikkei index is up 21% in U.S. Dollar terms.
Two added cautions for U.S investors in this race to the bottom with respect to currencies is the fact the U.S. is turning out to have the stronger currency. The stronger Dollar is attracting foreign in flows, but what happens when the Dollar begins to weaken? Will foreign investors sell U.S. assets? Secondly, the stronger Dollar will put downward pressure on multinational company earnings that are generated overseas. Certainly companies can hedge their currency exposure; however, this is not an easy game to play.
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