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.
Audrey Childe-Freeman, head of foreign exchange at JP Morgan Private Bank, said she remained sceptical of the sustainability of the move, should risk appetite be revised downward. She added the BoJ’s policy remained more constrictive than others, and was not matched by looser fiscal constraints.
‘The BoJ is not the only central bank adjusting to a dovish bias and so on a relative basis, the monetary case for a weaker yen has not changed much,’ said Childe-Freeman.
‘Also, for debt monetisation to prove successful at weakening a currency, one would expect it to be associated with a much weaker fiscal stance. This is not the case for now as the government is currently considering the introduction of a consumption tax.’
JPM has an end-of-year dollar exchange of ¥76, while Capital Economics is predicting an even larger reversion on its expectation of much-reduced risk appetite, pencilling in ¥70.
Nick Wakefield, author of global macro-analysis research service the Tail-Wind Report, said it is possible to make a case for continued weakness of the yen and domestic equity strength, however.
One of the effects of the healthier state of the US economy had been some normalisation of the Treasury yield he said, while Japanese yields were being suppressed thanks to the asset purchase programme.
‘Rising yield differentials between US and Japan would weaken the yen and provide the spark of improving competitiveness necessary to realise value in Japanese stocks,’ said Wakefield.
‘The Topix has consistently underperformed since the end of [former prime minister Junichiro] Koizumi’s tenure in 2007. Underperforming for five years has developed meaningful value.
‘It was notable that hardly any Japanese bank suffered in the credit crisis in 2008/09 and many believe their financial system to be sound. Moreover, should inflation emerge, the one country it would be welcomed is in Japan.’