A falling yen has helped boost Japanese stocks to record levels this year, but foreign investors believe there are still opportunities in these stocks even as the currency begins to strengthen. For most of this year, the weak yen has been a major argument for foreign investors looking at Japanese stock markets. For example, it improved corporate results for companies such as Toyota Motor. For investors holding Japanese assets denominated in yen, the currency’s decline has seen the value of their gains increase. And for a long time, a weakening yen seemed like a safe trade. From January 2021 to June 2024, the yen depreciated by 55% against the dollar to pass the 161 mark this June, its weakest level since 1986. However, the Bank of Japan’s decision to raise interest rates in late July — thereby narrowing the interest rate differential with the US — led to the currency finally starting to strengthen against the dollar. Meanwhile, the Nikkei 225 fell more than 12 percent on Aug. 5, its worst day since “Black Monday” in 1987. The yen last traded at about 144 to the dollar. JPY= YTD Mountain Yen vs. Dollar in 2024 “Yes, there is 1724484027 volatility, but we don’t hide from it. In fact, we’re embracing it and using the liquidity that the market gives us to scale positions,” said Janus Henderson portfolio manager Julian McManus. McManus isn’t the only one who increased his exposure to the Japanese market after the early selling August -off In the same week, Japanese equity funds saw their third-highest inflows so far, according to Jefferies.In the last four periods of “decisive” yen strength since 1995, the yen has strengthened by average 25% per strategist Shrikant Kale the dollar will lead to a 10% earnings cut in a soft landing scenario In this case the market will correct in a range between 9% and 14% in yen terms but will actually rise 5% to 9% on a dollar basis. Bank of America also believes that despite the risk to corporate earnings from a strengthening yen, there is still plenty of savings from the yen trading around the 156 level against the dollar. from April to June this year. On this point, Janus Henderson’s McManus agrees that the strengthening yen is not a concern for corporate earnings. Most companies used the 145 yen to the dollar level as a basis for budgets during this year, he noted, rather than higher levels. As a result, even with the yen trading significantly weaker than its 2024 highs, the annual average would still be weaker than the average exchange rate assumed by companies. “In Japan, we see earnings growth above consensus of 10-11%, supported by headline inflation and corporate reforms, which we don’t believe are disrupted by recent volatility,” wrote Morgan Stanley strategist Daniel Blake, in a note in Aug. 20. Helping Dollar-Based Investors The yen change will benefit foreign investors. Earlier in the year, even as the Nikkei 225 climbed to record highs, a weaker yen hurt stock prices in dollar terms. Before the yen started to strengthen, “Japanese investors could benefit because their lives and portfolios are denominated in yen. But for a foreign investor, it was more difficult because you couldn’t convert the value of your Japanese stocks in yen to a rising value of Japanese stocks in U.S. dollar terms,” said Peter Perkins, a partner at Macro Research Board Partners. As a result, the appreciation of the yen will help foreign investors realize profits from the Japanese market. The Nikkei 225 continues its recovery has rebounded from the Aug. 5 sell-off and is now up nearly 15% year-to-date.N225 YTD Nikkei 225 mountain in 2024 Historical trends support Japan’s outperformance during periods of strong yen, Jefferies said four cycles of the yen’s strength, the MSCI Japan index fell more than 7% in yen terms, but gained 24% in dollar terms, the firm said — and even beat the MSCI All Country World Index’s 24%. “This suggests that, if the cycle is heading towards [a] period of persistent yen strength, global investors should be overweight Japan,” Jefferies said. Bank of America predicts the stock market will make a “full recovery” by late September or October and estimates the market will trade near March highs through the end of Despite the rise in volatility for the yen, the currency remains relatively cheap, Perkins noted.The 120 level, he added, investors should look to gradually gain exposure now, rather than holding out with the hope for greater stability in the yen, Perkins said “Of course, the move from 163 to 147 is a reminder that things can change quickly. … Gradually increasing exposure and taking advantage of any weakness we think would be the right thing to do,” he said. Certainly, exogenous shocks or threats to either the Japanese economy or global growth could threaten the outlook, Perkins added. it may happen, but we see no basis to believe that it will happen,” he said. “It’s kind of a wildcard, and you can’t make an investment strategy by worrying about wildcards all the time.”
