The US dollar gained 21% versus the Japanese yen in 2013. Will it continue in 2014?
Betting on US stocks wasn't the only way investors made money in 2013. One of the big trades of 2013 was buying the US dollar versus the Japanese yen. That yielded a 21% gain in the year that just ended.
While the Japanese yen was weaker versus the US dollar, Japanese equities certainly weren't. The Japanese stock market benchmark Nikkei 225 index closed 2013 up 57%, its biggest climb in over four decades. Even in US dollar terms, the Nikkei was up about 29%, the same as the US benchmark S&P 500 index.
One thing that helped the dollar gain versus the yen – and which also had a role in boosting the US and Japanese equity markets – was action by their respective central banks.
Though the Federal Reserve Bank purchased $85 billion in US Treasury and mortgage bonds per month throughout 2013 as part of its "quantitative easing" monetary stimulus, the Bank of Japan also went on its own buying spree. The BoJ has been spending 7.5 trillion yen per month – about $71.2 billion worth – on assets to propel the Japanese economy. Given that the Japanese economy is about one-third the size of the US economy, the effects of money-printing are even stronger on the yen.
With the dollar relative to the yen, the Nikkei, and the S&P 500 all moving together, what does that mean for investors in 2014?
CNBC contributor Andrew Busch, editor and publisher of The Busch Update, notes that most observers expect another 15% rally in the dollar versus the yen. "If that occurs, we're talking about the Nikkei following along by at least that amount and certainly the S&P being dragged up by at least about half of that," says Busch, who believes there will be at least some correction soon in the S&P 500. "If you believe dollar yen is going to go to 120, you want to be long these two stock markets."
Agreeing with Busch is CNBC contributor Gina Sanchez, founder of Chantico Global.
"Over the last five years, we've seen Japan increase their balance sheet by 82.5%," says Sanchez. "It's starting to show some real results."
Sanchez cites the 5% rise in industrial production coupled with a 1.2% increase in consumer prices last month as examples of the effects of Japan's asset purchase program. She believes the program's continuation will weaken the yen, keep rates lower, and cause investors to take on more risk.
"I think the yen continues to go down from here, especially if you pair that with the fact the Fed is obviously starting to taper," Sanchez says, referring to the US central bank's recent decision to decrease the amount of bonds it will buy each month.
To see more of Sanchez and Busch on what's next for the yen, the Nikkei, and the S&P 500, watch the video above.
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