After many false dawns yen crash finally pushes Japanese revival

A glimmer of light has broken over the land of the rising sun. Little more than four months after the Bank of Japan intervened to cap the soar-away value of the yen, the currency has slumped 7% versus the dollar over recent weeks.

The impact on domestic assets has been dramatic: in yen terms the Topix 100 has risen 15% since the most recent low on 12 January, equivalent to 11.6% once you have translated that back into sterling terms. This compares to a 3.7% gain on the Dow over the same period.

Technical traders, such as US-based Bespoke Investment, noted the yen is within a few percentage points of its lower resistance level on a five-year uptrend versus the dollar. A significant move down from here would establish a new trend, while resistance could suggest significant upside.

An export boost

Either way, at current levels the yen offers a big boost for the export-dependent economy. The big ‘if’ remains whether the factors which have pushed the value down are truly sustainable, however.

‘Japan’s stock market has tended to underperform its US counterpart over the past couple of years as the yen has strengthened against the dollar,’ said Capital Economics markets analyst John Higgins.

‘This is presumably because the level of the exchange rate is widely seen as crucial to the prospects for Japan’s economy, given the persistent weakness of domestic demand. A weaker yen enables Japan’s exporters to gain market share or to boost margins.

‘A significant chunk of Japanese companies’ overall profits also comes from their foreign operations – if the yen weakens, overseas profits are worth more in Japanese currency.’

Since the end of January, the dollar/yen spot rate has moved from ¥76.19 to ¥81.55. Importantly, with rates across the Western world pegged near zero, there is no fundamental interest rate differential to play, nor any expectation that one will develop.

Revised risk appetite driving investors back to the dollar has been the primary driver, and the Bank of Japan’s (BoJ) limited adoption of monetary stimulus, having approved ¥65 trillion in asset purchases since October.