It’s the yen, stupid!

In Japan, larger cap growth stocks have rebounded strongly following their US counterparts based on the view that US rates have peaked and we might see rate cuts sometime next term. Indeed, many firms which had revised down forecasts in the most recent earnings season have seen their shares bounce quickly above their pre-result levels with techs notably leading the way. 

Topix has rallied by nearly 10% and back towards its mid-Sep highs while Nikkei which is more tech heavy and had peaked much earlier in June, has also rebounded towards its key Y34K line. To be sure,  we think the positive secular trend of listed Japanese firms improving governance and shareholder returns remains intact.  However, whether the tumbling yen will continue to be viewed positively by global investors remains to be seen. 

Indeed, we still remain fairly cautious in regards to Japan’s manufacturers and exporters and expect weaker recovery trend next term than what many analysts seem to be predicting. This is especially so in the case of techs and autos, two main engines of Japan’s big rally this year. 

To recount, we think China’s massive front-loading of deliveries for semiconductor production tools may be nearing its peak while the positive impact of improving chip shortages on auto output look to be fully priced in as concerns grow about weakening auto sales and fierce competition emerging in the EV segment. Moreover, the positive impact of devalued yen in flattering earnings of Japanese multinationals is also starting to fade. 

In the meantime, Japan’s PM, Kishida-san is handing out big amounts of public money to households to try to drag himself up on the opinion polls which suggest his popularity has fallen to dangerously low levels where the ruling LDP party may be forced to find a new leader. With seemingly no taxation plans yet to finance the government’s big spending increases, and yen in a free fall against all major currencies, we think the nation might be losing confidence in its policy makers as Kishida’s handouts seem not be working in salvaging his public perception as suggested in the most recent polls. 

Moreover, reports of unhedged investments into US treasuries by Japan’s life insurance firms more recently and reportedly big gold purchases by high net worth Japanese individuals also suggest that confidence in yen is eroding despite BOJ’s YCC tweaks. With overseas bond issuers led by Warren Buffet also looking to raise big funds in yen, the carry trade momentum seems robust, potentially adding more pressure.  

For now, BOJ is sticking with its “looser for longer” policy, with its governor, Ueda-san most recently defending his stance to Japan’s lawmakers by even arguing that there are also merits to yen’s depreciation that should be considered. This seemed very careless remarks given where we are in the currency market right now. 

But we also retain the view that BOJ’s policies are being heavily influenced by the bank’s paymasters at MOF who are desperate to keep financing costs low (as over a quarter of annual national budget is currently set aside to finance Japan’s cumulative deficit that has reached over 260% of GDP) with little regards to what that is doing to the value of the currency. 

Although the recent reversal in the US dollar has helped kept the $¥ rate stable at around 150 level for now, it should be noted that the Japanese unit has been crushed against other majors more recently, reaching all time lows against the Euro and the Swiss Franc. It is also worth noting that not long ago, the yen shared the much coveted safe haven qualities with the Swiss unit.

We think these continued policy missteps are needlessly destroying the country’s purchasing power and threatening to keep imported costs up while doing little for confidence in investing in Japan. Moreover, the devaluing yen is also piling on cost pressures on Japan’s understaffed service sector which is struggling to cope with huge inbound volumes of tourists which have recently reached pre-Covid levels despite Chinese inflows still being down by over 60% from the pre-pandemic period.

Although we have no idea whether further falls in the value of the Japanese unit could spark some sort of currency contagion, there is always that possibility. However, Japan’s political and economic policy makers seem oblivious to these impending dangers that we think currently centres around then yen.