- After extreme weakening in 2022, the yen has found its footing recently. We maintain our view of a potential reversal and see a rising likelihood of a yen appreciation this year.
- Three factors that may spark further yen strengthening: (1) normalisation of monetary policy, (2) pressure from domestic conditions, and (3) re-direction of investor flows to the yen.
- While a weaker yen tends to be supportive of Japanese equities, we believe a rebound at such extreme levels should not detract from equity performance. We prefer an unhedged share class to maintain exposure to the yen.
Chart 1: Yen has depreciated significantly relative to G10 currencies and the SGD last year…
Chart 2: …The REER has also fallen to an all-time low last year but has since rebounded
What drove the bloodshed in 2022?
Chart 3: Widening yield differential drove severe yen weakness last year but we expect that to reverse in 2023
Chart 4: A weaker yen and costlier energy imports have worsened Japan’s trade deficit which in turn put downward pressure on the currency
Major drivers for the yen
1. Normalisation of monetary policy (potential removal of YCC)
Chart 5: Before the Silicon Valley Bank incident, 10-year JGB yields were trading near the ceiling. The swap yield suggests upwards pressure on 10-year JGBs.
Chart 6: Markets are expecting higher policy rates from the BOJ three months from now and lower rates from Fed and ECB six months from now.
2. Domestic and financial conditions are exerting pressure on the BOJ
Chart 7: Major measures of CPI have surged to multi-decade highs
Chart 8: The Japanese bond market functioning deteriorated further even after December’s YCC tweaks, prompting further intervention
3. Investor flows re-directed to the yen
Table 1: Historically, the yen has strengthened relative to USD/trade partners during risk-off episodes except for the current one
Chart 9: Strong correlation between the change in USDJPY and the value of foreign net buy/sell of Japanese stocks
How will a stronger yen impact Japanese equities?
The Research Team is part of iFAST Financial Pte Ltd.
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