Great Graphic: Yen and the Nikkei

This Great Graphic, made on Bloomberg, shows how well the dollar-yen and Nikkei have moved together in recent years.  The dollar-yen rate is represented by the white line and the Nikkei by the yellow line.  

Conventional wisdom would suggest that the weakening yen is good for Japanese stock prices through an increase in exports.    This seems like an exaggeration.

The fact of the matter is that Japan is not nearly export-dependent as one would expect.  For example, it exports about 15% of what it produces.  This in line with US exports as a function of GDP and contrasts with the 40% of more that Germany, Finland, Sweden and Switzerland export. 

Japanese producers increasingly service foreign demand the same way US companies do, primarily, though of course not exclusively, by building locally.    It is not through exports as much as local sales through which the weaker yen boosts reported earnings.  In addition, as we saw recently with Japan's current account figures, the weaker yen also translates into higher foreign investment income.  It is that investment income that offsets Japan's trade deficit and allows it to run a current account surplus.  

Lastly, we note too that financials and brokers also benefit from the rising stock market and during parts  of the rally, that sector led exporters higher.   The booming Japanese equity market, the first in five years, may encourage Japanese households to rediscover equities after shunning them, with fixed income yields miserably low at home and abroad.

Japanese institutions trying to allocate for the new fiscal year may too find that their own equities is the only game in town.  Foreign investors who have already scooped up $72.6 bln worth this year alone may have beaten them to the punch.