Japan still unstable

The U.S., Japan, and Europe hit a fiscal wall after setting their monetary policies to zero.

“The entire monetary and fiscal policy is ineffective in this environment, so it leaves only currency as the last element of stimulus for these economies,” says Luc de la Durantaye, first vice president, global asset allocation and currency management at CIBC Global Asset Management.

After having one of the strongest currencies post-financial crisis, Japan is being forced to depreciate its yen.

Read: Hedge your bets on Japan

“The yen had appreciated quite strongly to the point where it was becoming intolerable for the Japanese economy,” explains de la Durantaye. “[And] last September and October, the yen really started to weaken.”

The country is still facing a very high fiscal deficit—more than 7%, which is worse than the U.S. or Eurozone. Also, Japan’s debt-to-GDP is the worst among the G20 countries since it stands at more than 200%.

Read: Japan stuck in recession

To stimulate the economy, the country has adopted a number of policies.

“We think they’ll increase quantitative easing, and…try to outdo the Federal Reserve, the UK and Europe to continue to depreciate its currency,” says de la Durantaye.

Read: Central bank intervention is the new norm

He adds, “Japan is at a point of no return. Despite the fact the yen has already depreciated, we think it can [fall] further.”

So investors who own Japanese equities should pay close attention to currency movements.

“If the yen depreciates, then you’re losing money on that currency,” says de la Durantaye. “Take protection against [such] currencies.”

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