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Weakness in the Japanese yen (JPY:USD), hitting 43-year lows, is unlikely to drag down the positive momentum seen in Japanese stocks (NYSEARCA: GO), (DXJ), as the drivers of its recent rally remain strong.
BlackRock Investment Institute analysts, led by Jean Boivin, wrote in a weekly commentary note that they don't see the pressure persisting and remain overweight Japanese stocks (GO), (DXJ) over a tactical horizon of six to 12 months.
The 12-month returns for the MSCI Japan ETF (EWJ) are almost 14% in US dollars.
This is because the country's growth prospects remain positive as corporate reforms are underway and rising wages are supporting consumer spending, he said. “Ultimately, the weakness of the yen (JPY:USD) is mainly due to the gap between the official rates of the Bank of Japan and the Federal Reserve. The yen could rally once the Federal Reserve cuts.”
At the end of April, the yen (JPY:USD) fell to 160 per dollar. It is currently at ¥156.38. Japan has been buying U.S. dollars and warning investors against the yen, which is helping to stem the slide, Boivin said.
The yen began to depreciate in 2022 after the Federal Reserve began raising rates, and later in April after the BOJ said it would not rush to reverse its loose policy, while markets delayed their currency prices. Fed rate cuts this year due to continued inflation in the United States
Additionally, there is a widening gap between the US and Japanese 10-year bond yields. The 10-year US Treasury bond yield (US10Y) surpassed Japanese government bond yields by almost 400 basis points, a gap close to 20-year highs.
“However, we believe the gap between the US and Japanese 10-year yields could narrow again as the BOJ and Fed policy rates begin to move closer to each other,” Boivin said. “Persistent US inflation may mean the Federal Reserve will keep interest rates high for longer, but we still see it starting to cut them later this year, and the BOJ is likely to raise rates again as it cautiously normalizes.” its emergency policy of negative interest rates. “
He added that if the yen weakens beyond that point, it could strengthen inflation because the cost of imported food and energy could rise. Japanese companies would be hit by higher manufacturing costs and lower profits.
The Bank of Japan could tighten policy, but analysts consider this unlikely due to improving growth prospects. A more likely answer would be food and energy subsidies.
Finally, major structural changes are boosting returns in Japanese stocks (EWJ), (DXJ) and creating long-term opportunities in the region. These include an aging population, which can catapult automation efforts to increase productivity, Boivin said.
