Japan's stockmarket gets a boost from the weak yen

Japan’s stockmarket has outperformed so far this year, with corporate profits at their highest since 1954 and a weak yen inflating overseas earnings.

Japan “has a chance to break free from decades of low or no inflation”, says The Economist. The aftermath of the Covid-19 pandemic and the global surge in commodity prices “seem to have done what years of loose monetary policy could not”. Annual inflation hit 2.6% in July, with the Bank of Japan (BoJ) expecting inflation of 2.3% for the current fiscal year. Excluding sales tax rises, that “would be the first time prices outstrip the bank’s 2% target since it was introduced in 2013”.

Rising prices have generated some disquiet domestically, but Japan’s inflation is “quite mild” compared with levels in many other developed countries, says Aaron Beck in The Wall Street Journal. The BoJ looks unlikely to “flinch” from its current ultra-loose monetary policies.

Japanese inflation is largely driven by higher import prices – economist Richard Katz notes that “88% of Japan’s inflation over the past three months came from volatile food and energy prices” – so the Bank feels little need to cool the economy. Local wage growth also remains sluggish.

The growing gap between tighter monetary policy globally and loose money in Japan pushed the yen to a 24-year low against the dollar this month. Interest rate differentials prompt traders to sell the yen in favour of assets denominated in currencies that offer higher returns. The yen started the year at ¥115 to the dollar but has since slumped to ¥144.

Is the yen no longer a safe haven for investors?

Analysts warn that the market may “soon test the late 1990s low of ¥147 against the dollar”, says the Financial Times. The yen has historically been considered a safe haven in troubled times, but it has plunged despite this year’s geopolitical chaos. A cheaper yen would also be expected to encourage overseas investors to buy up Japanese stocks, but “foreigners have been net sellers of more than ¥650bn of stocks since January.”

Maybe they should take another look. Mass outsourcing means a weaker currency doesn’t provide a boost to Japan’s manufacturing economy like it used to, says Yann Rousseau in Les Echos. But large firms still benefit because overseas earnings are inflated when translated back into yen terms. Indeed “Japan’s corporate profits have risen to their highest levels since 1954”, says Yoshiaki Nohara on Bloomberg. That has helped the Topix stockmarket benchmark, down just 2% this year, to outperform many others.

Corporate Japan’s “newfound earnings resilience” also rests on improving capital discipline after years of reform, Daniel Blake of Morgan Stanley told Aya Wagatsuma on Bloomberg. With local monetary policy set to remain loose, Japanese stocks look “better able to withstand the pressures facing peers around the world”. Just watch out for the plunging currency.

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