Japan’s financial markets are grappling with the impact of a rising yen, a development that has largely hurt the country’s stock performance. Since the yen’s notable appreciation began, Japanese equities have struggled, as evidenced by a 4% drop in the iShares MSCI Japan ETF (EWJ) since July 11. This decline coincides with an 8% jump in the yen against the dollar, a movement fueled by a softer U.S. inflation report and anticipation of Federal Reserve interest rate cuts.
The yen’s recent ascent is significant given Japan’s reliance on global manufacturing giants such as Toyota, Sony, and Hitachi, whose profits are typically bolstered by a weaker yen. With about 60% of their earnings coming from overseas, these companies benefit when a weaker yen amplifies their foreign revenues upon conversion. However, the stronger yen is diminishing these benefits, prompting investors to pivot towards domestic sectors less impacted by currency fluctuations.
Recent changes in Japan’s monetary policy have also influenced this shift. The Bank of Japan (BOJ) ended its eight-year policy of negative interest rates on July 31, introducing a modest 0.25% rate. This move, described by Aaron Hurd of State Street Global Advisors as the most significant BOJ meeting in a decade, has strengthened the yen further. As the yen rebounded from a low of 161 to the dollar on July 11 to approximately 149, Japanese imports have become cheaper, potentially easing inflation pressures and allowing for future policy adjustments.
Against this backdrop, there is increasing investor interest in domestic Japanese stocks, particularly within the financial sector. Both Michael Kelly of PineBridge Investments and Daniel Hurley of T. Rowe Price are optimistic about Japanese banks, predicting they will benefit from rising interest rates and potential loan growth. The major banking institutions—Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group—have seen their shares fall more than 10% in recent weeks, presenting a buying opportunity for those bullish on the sector’s recovery.
Despite the current volatility, some experts, like Marko Papic of BCA Research, caution that Japan’s economic challenges are more tied to broader recession fears rather than just the yen’s movements. Additionally, Japan’s other major export market, China, is struggling, which adds to the uncertainty.
Long-term prospects for Japan remain positive, however. After enduring three decades of sluggish growth, Japan’s labor costs have become competitive globally, even against regions like China. Structural reforms aimed at increasing dividends and share buybacks are also helping to boost valuations. The Japanese market, considered one of the cheapest among developed economies, is expected to continue its gradual revaluation, aligning more closely with European and eventually U.S. market levels.
In conclusion, while the rising yen poses challenges for Japanese exporters, the financial sector stands to benefit. Investors should watch for opportunities within Japanese banks and consider the long-term potential of Japan’s evolving economic landscape.
I am Aparna Sahu
Investment Specialist and Financial Writer
With 2 years of experience in the financial sector, Aparna brings a wealth of knowledge and insight to Investor Welcome. As an accomplished author and investment specialist, Aparna has a passion for demystifying complex financial concepts and empowering investors with actionable strategies. She has been featured in relevant publications, if any, and is dedicated to providing clear, evidence-based analysis that helps clients make informed investment decisions. Aparna Sahu holds a relevant degree or certification and is committed to staying ahead of market trends to deliver the most up-to-date advice.
