At the beginning of this year, Japanese stocks once led the world and attracted the attention and entry of many foreign investors. However, with the recent significant depreciation of the Japanese yen, it has fallen to a 34 year low against the US dollar, and the attractiveness of Japanese stocks to foreign investment has also greatly diminished.
BlackRock warns that if the yen continues to weaken, it will dampen foreign enthusiasm for investing in Japanese stocks.
The depreciation of the Japanese yen will drag down Japanese stocks
Although the Nikkei 225 index has risen by a cumulative 14% since the beginning of the year, outperforming other major global stock markets significantly. However, if the depreciation of the Japanese yen against the US dollar is taken into account, the attractiveness of Japanese stocks to foreign investors appears mediocre: the annual increase in US dollar denominated Japanese stocks has narrowed to just over 3% - far below the 9.5% increase in the S&P 500 index and the 11% return on the Hong Kong Hang Seng index in US dollars.
"If the yen continues to weaken, investing in the Japanese stock market will become even more difficult. When you talk to global investors about Japan, foreign exchange is definitely everyone's top consideration," said Yue Bamba, head of active investment at BlackRock Japan
Although the depreciation of the yen has boosted the profits of export companies, as a country that relies heavily on imports for its resources, the depreciation of the yen itself will also increase the expenditure costs of domestic consumers in Japan and increase the burden of import costs on Japanese companies. In recent days, the Nikkei 225 index has still fallen more than 6% from its record high, reflecting market concerns about this situation.
The fate of the yen is determined by the Federal Reserve
Bamba said that the future performance of the yen will depend more on the actions of the Federal Reserve, rather than the Bank of Japan. If the Federal Reserve does not cut interest rates, the Japanese yen may gradually fall to the range of 170 yen per dollar. If the Federal Reserve can cut interest rates, the yen exchange rate is also expected to rebound to the level of 130 to 135 yen per dollar.
As of the time of publication, the exchange rate between the Japanese yen and the US dollar has fluctuated around 155.40 yen per US dollar. Bamba believes that the fair value of the yen is "much higher" than its current level and "easily rebounds back to over 130 yen per dollar.". So, if the Japanese yen can rise above 150 against the US dollar, overseas investors will soon return to the market.
In the past few weeks, the Japanese government may have intervened in the market at least twice to support the decline of the yen. Bamba expects that in the future, Japanese authorities may continue to try to support the yen due to its continued weakness; Quota; Becoming a headache inducing political issue& Quota—— This is not only detrimental to the country, but also to the living expenses of residents.
Bamba also predicts that the Bank of Japan may raise interest rates in July or October to support the yen. He mentioned that recently, there has been a noticeable shift in the tone of Bank of Japan Governor Kazuo Ueda on exchange rate issues, which can to some extent advance the time for Japan's monetary policy to move towards normalization.
Not only Bamba, but other investors also believe that the Bank of Japan will boost the yen by raising interest rates. Vanguard Group Inc. predicts that the benchmark interest rate in Japan will rise from the current 0% to 0.75% by the end of the year. Pacific Investment Management believes that the Bank of Japan may raise interest rates three times.
On the other hand, hedge funds are betting that the yen will further weaken. Short term funds have started buying options in the 160-61 range.
Bamba has long been optimistic about the Japanese stock market. He stated that although macro factors such as the Middle East war and the hawkish tone of the Federal Reserve have suppressed a preference for Japanese risk assets, the fundamentals of the Japanese stock market remain strong, driven by Japanese corporate reforms, domestic investment, and wage growth.