What does a weak yen mean for Japanese stocks?

“The Japanese government no longer knows what to do,” says Yann Rousseau in Les Echos. Tokyo has promised a “firm fight” against yen volatility, but the currency continues its “inexorable slide”, recently hitting its lowest level against the US dollar since 1986. 

This spring the country’s finance ministry spent ¥9,800 billion (£48 billion) on currency-market intervention to prop up the yen. That sparked a brief rally, but the “respite” lasted only “a few days” – then it plunged again. The yen has dropped 12% against the dollar this year, says Mary McDougall in the Financial Times. 

So, what does a weak yen mean for the Japanese economy? In March Japan ended eight years of negative interest rates, but rates are still barely above zero. The central bank has been “cautious” about the prospect of further rises, even as the US central bank, the Federal Reserve, holds rates high. The resulting US-Japan yield gap has powered a re-emergence of the “carry trade”, says Anna Hirtenstein in The Wall Street Journal. 

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The trade sees investors borrow in yen at low interest rates and then park the cash in higher-yielding currencies for an easy profit. The carry trade is driving renewed selling in the yen. Data from the Commodity Futures Trading Commission shows that “asset managers have amassed the biggest net short position, or bet against, the yen in at least 18 years”.

Is a weak Yen good for Japanese stocks?

A weak yen is traditionally regarded as a boon for Japanese stocks, says Jacky Wong in the same paper. More than half of the firms on Japan’s Topix index are exporters, and thus benefit from a weak currency. The likes of Toyota and Honda are enjoying “record profits” on the back of the yen’s slide. 

However, there are two drawbacks to a weak yen, say Winnie Hsu and Masaki Kondo on Bloomberg. First, the currency’s “relentless slide” increases import costs. That makes Japanese households poorer, weakening the domestic economy and harming local retail stocks. Second, a weaker yen erodes the returns of foreign investors. The local Topix index has gained 20% this year in yen terms, but only about 7% in sterling terms. 

The yen’s “slump” is starting to prove more harmful than helpful to Japanese shares. Foreign investors have been net sellers of Japanese shares for five weeks in a row. Much blame lies at the door of the Bank of Japan, says Russ Mould of AJ Bell. Under governor Kazuo Ueda the bank has “managed one meagre interest-rate increase”, and it is still printing money as part of a quantitative-easing programme. 

The yen has slumped 62% against gold since the start of last year, vindicating “gold bugs” who have flagged Japan’s bad public finances, “weak demographics” and self-defeating central bankers. We should watch closely – Japan is far from the only developed country to have got itself into this dangerous predicament.

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