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Yen Is a Proxy for Japanese Recovery, Not a Driver of U.S. Stocks


What was once a sort of oddball idea has become conventional wisdom: when the Japanese yen goes lower the U.S. stock market goes higher. Like anything else "everyone" believes, it's worth some time to question the premise before making investment decisions.

Certainly the relationship between the yen and the S&P 500 (^GSPC) has been a theme of 2013. The year-to-date chart shows the dollar strengthening against the yen in almost perfect lock-step, peaking within days of one another last month.

As of Wednesday morning $1 will buy 14% more yen than it did at the end of last year and the S&P is up 14.6% in the same time.

Viewed in such a small time frame the yen/stocks relationship is clear. A broader view suggests the S&P 500 and the yen aren't tightly correlated. See five-year chart below.

Over the five year period ending November 19th of last year, roughly when this leg of the U.S. stock rally kicked into high gear, the S&P 500 lost about 6% compared to the yen losing more than 1/4 of its relative value compared to the buck.

Hugh Johnson, chairman & CIO of Johnson Advisors, says the way the dollar and yen are synching up markets this year is being driven by optimism over a Japanese recovery less than the yen. The FOMC has been unofficially trying to "keep some downward pressure on the dollar (for years)," as Johnson sees it. That works to the benefit of U.S. multinationals. In a vacuum that's not a horrible thing.

The entire economic world has been held back by the third largest economy extant doing nothing for a quarter of a century. If Japan can pull back from deflationary pressure and get their economy moving, the entire industrialized world would benefit, at least for a while.

None of which should impact your investing decisions today. Johnson says the relative performance of the U.S. is outstanding, regardless of currency. "Ours seems to be the best game in town," he states.

Saying so may be damning our economy with faint praise but it nicely puts our obsession with the relationship between the yen and the stock market into some context.