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With Japanese stocks rising to their highest level in three decades, strategists at Bank of America are forecasting further weakness in the country’s currency from current levels.
While the Bank of Japan’s ultra-dovish monetary policy stands in stark contrast to its global peers who have kept interest rates high, strategists say the approach to buying Japanese stocks and the yen may be next year’s approach, not this year’s.
Rate and equity strategists including Shusuke Yamada and Tony Lin said the phrase “buy Japan” – used to call investors to buy Japanese stocks and the yen – was “premature”.
Japan’s delayed cyclical recovery and the Bank of Japan’s uniquely patient stance are positive for Japanese stocks and negative for the yen
Calls to buy Japanese stocks and the yen could be “potential trades into 2024,” strategists said in a note on Monday. However, it is “conditioned on confirmation of Japan’s virtuous inflationary cycle and the government’s policies to promote domestic capital expenditure and foreign direct investment.”
Inward FDI refers to an investment by a foreign entity in another country (in this case, Japan). In contrast, Foreign Direct Investment This happens when a Japanese company expands its operations abroad. They include cross-border mergers and acquisitions and investments in foreign entrepreneurial projects.
Latest data from Japan Ministry of Finance International investors bought Japanese stocks worth 867.5 billion yen ($6.2 billion) in the week of May 14-20, down sharply from 2.4 trillion yen in the first week of April, the data showed.
Given Japan’s significant deficit in foreign direct investment, indicating that foreign direct investment exceeds inward direct investment, Bank of America expects the yen to weaken further to 143 against the dollar by the third quarter of this year.
this Japanese currency USD/USD traded weaker at 139.7 Thursday afternoon.
delayed recovery
Bank of America expects the Bank of Japan to maintain its negative interest rate policy and yield curve control framework through the second quarter of 2024.
While the Bank of Japan’s monetary stance of keeping interest rates ultra-low is good news for stocks for now, it will mean further pressure on the yen as global central banks continue to raise rates to curb inflation.
“Japan’s delayed cyclical recovery and the Bank of Japan’s uniquely patient stance are positive for Japanese equities and negative for the yen,” they wrote.
The Bank of Japan’s sticking to its current monetary policy stance, coupled with its FDI deficit, will be the main factor behind the yen’s weakness.
“Funding the yen, buying Japanese equities at still-reasonable valuations could be an attractive carry trade,” Bank of America strategists wrote. There will be a negative correlation because foreign investors need to adjust their currency hedges to stock market volatility.”
A carry trade Is an investment strategy that involves borrowing at low interest rates and reinvesting in assets with a higher rate of return.
A recovery in Japan’s current account surplus due to lower oil prices and a return of tourists visiting Japan could boost the yen this year, strategists said, adding that it would not outweigh the deficit in foreign investment.
“We don’t think this is enough to correct the yen’s undervaluation, as Japan’s FDI deficit remains large and the BOJ appears reluctant to raise rates anytime soon,” they said.