- In the near-term, the yen faces downward pressure from the interest rate differential between the BOJ and global central banks as well as Japan’s trade deficit.
- Beyond the near-term, we see more reasons supporting the case for a stabilisation and even a potential reversal. Yen downside looks increasingly limited relative to its upside against major currencies.
- Four factors anchor our view: i) a potential halt in the interest rate differential, ii) further FX intervention, iii) safe-haven inflows, and iv) Japan’s relative economic strength.
- A stabilisation or even a yen rebound at such extreme levels can be supportive of Japanese equities. We now recommend an unhedged approach to Japanese equities, maintaining exposure to the yen.
Chart 1: Yen has depreciated significantly relative to G10 currencies and the Singapore dollar
Chart 2: Japanese yen has depreciated dramatically, with the REER around historically low level
Downward pressure on yen may persist in the near-term
Chart 3: Yen’s weakness relative to major currencies has been driven by widening spreads
Chart 4: Together, a weaker yen and costlier energy imports has worsened Japan’s trade deficit which in turn puts downwards pressure on the currency
But the likelihood of stabilisation and even a reversal has risen
Chart 5: Whenever yen weakens (negative value, shaded area) inflation picks up, mainly through higher imported inflation
Chart 6: Yen shorts have been building since late August. An FX intervention may deter further shorts
Table 1: Historically, the yen has strengthened relative to USD/ trade partners during risk-off episodes except for the current one
Chart 7: Consensus expects Japan to deliver relatively stronger growth, after lagging in 1Q – 2Q 22
Strategy for Japanese equities
Table 1: Recommended Products
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Unit Trust |
ETF |
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