Source: Zhitong Finance
The Nikkei 225 Index has risen 14% this year, outperforming its global peers. But for dollar-based investors, after the yen fell to a 34-year low against the US dollar, this increase shrank to just over 3%.
The weakening yen is keeping foreign investors away from the Japanese stock market.
The Nikkei 225 Index has risen 14% this year, outperforming its global peers. But for dollar-based investors, after the yen fell to a 34-year low against the US dollar, this increase shrank to just over 3%. This is far below the 9.5% increase in the S&P 500 index and the 11% return in US dollars for the Hang Seng Index.
Yue Bamba, BlackRock's head of active investment in Japan, said: “If the yen continues to weaken, it will become more difficult to invest in the Japanese stock market. When you talk to global investors about Japan, forex is definitely everyone's first consideration.”
The depreciation of the yen boosted the profits of exporters, and exporters have always been the driving force behind the rise in the Japanese stock market. Despite this, the Nikkei 225 index fell more than 6% from its record high, as the market feared that the yen was becoming a burden on domestic consumer spending and corporate import costs.
Bamba said that the future performance of the yen depends more on the actions of the Federal Reserve than the Bank of Japan. If the Federal Reserve does not cut interest rates, the yen may gradually fall to the 170 yen range against the US dollar. Also, if the Federal Reserve cuts interest rates, the level of 130 to 135 is “completely imaginable.”
The yen fell to around 155.40 on Friday, a level which Bamba believes is “undervalued”. He said the fair value of the yen was “much higher” than the current level and “could easily reach more than $130.” He said that if the exchange rate of the yen breaks through 150 against the US dollar, overseas investors will be relieved to return to the market.
The Japanese government may have interfered in the market at least twice in the past few weeks to support the yen's decline. Bamba said that Japan's monetary authorities may continue to try to support the yen, as the continued weakness of the yen “is becoming a troubling political issue” because it is bad for the country and not good for living expenses.
Bamba anticipates that the Bank of Japan may raise interest rates in July or October, until then the central bank will reduce purchases of Japanese treasury bonds. According to Bamba, Bank of Japan Governor Kazuo Watada's tone on the exchange rate issue has clearly changed recently, which can advance the time towards normalization to a certain extent.
Other investors also believe that the Bank of Japan will boost the yen by raising interest rates. Vanguard Group Inc. predicts that Japan's benchmark interest rate will rise to 0.75% before the end of the year, and the current range is 0% to 0.1%. Pacific Investment Management believes it is possible to raise interest rates three times.
Hedge funds, on the other hand, are betting that the yen will weaken further. Short-term capital has begun to buy options in the 160 - 161 range.
Bamba has been optimistic about the Japanese stock market for a long time. He said that although macroeconomic factors such as the Middle East war and the hawkish tone of the Federal Reserve have curtailed preferences for risky assets, market fundamentals are still strong, driven by corporate reforms, domestic investment, and wage growth.