US investors should be wary of betting on the booming Japanese stock market

Between the news from Ukraine and the latest statements from the Federal Open Mouth Committee, you’d be forgiven if the recent fall in the yen escaped your attention. But the impact of currency movements has implications far beyond the Japanese economy and markets.

In March, the yen fell from 115 to the dollar to 125 before returning to around 122. (A higher number indicates a weakening of the Japanese currency, as it takes more yen to buy a dollar.) The simple explanation is that the Federal Reserve initiated interest rate hikes, while


Bank of Japan
maintained its ultra-easy policy. This included buying an unlimited number of Japanese government bonds, or JGBs, to cap the benchmark 10-year yield at 0.25%, which meant electronically printing more yen and, hence, driving down the exchange rate of the currency.

Injecting more money is usually a drug that improves asset price performance, so it’s no surprise that the


Nikki 225

gained 4.88% in March, its best month since November 2020, when global markets surged on news of an effective Covid-19 vaccine.

But currency-adjusted returns are what matter to those who keep their points in dollars, as our dear and former colleague Peter DuBois, the original columnist for International Trader, would remind us. For American investors in the


iShares MSCI Japan

exchange-traded fund (ticker: EWJ), the fall of the yen led to a decline of 2.1% in March despite the rally in Tokyo. U.S. investors who wish to invest in Japanese equities without currency risk should consider the


WisdomTree Japan Hedged Equity

ETF (DXJ), which gained 3.5% in March.

“Overall, the weak yen is good for Japan,” Bank of Japan chief Haruhiko Kuroda said recently, a sentiment seemingly echoed by the Nikkei’s advance. This may have been the case in the past, but Macro Intelligence 2 Partners argues that the Japanese economy is radically different from what it was in the 1980s. Previously export-driven, it is now in current account deficit. , while continuing to depend on oil and food imports.

Soaring energy and food prices is doubly painful for Japanese consumers, who must pay for these necessities in depreciated yen, and for businesses that depend on materials of foreign origin. Shunichi Suzuki, who heads the finance ministry, said the yen’s weakness should be watched closely to see if it has an adverse effect.

The impact of yen weakness could extend beyond Japan, writes Albert Edwards, global strategist at Societe Generale. The BoJ’s efforts to cap JGB yields could moderate the rise in US and Eurozone yields. Yen-based investors don’t care if US inflation is running at 8% or 18% if they can buy US Treasuries at 2.5%, much more than the JGBs are offering. But they care whether the extra return is offset by currency movements – a tailwind for them lately.

Past bouts of yen weakness have had knock-on effects. The decline of the yen in 2013-2015 caused competing Asian currencies to fall, leading to the disruptive devaluation of the yuan in August 2015 by China. With the Chinese economy hit by a drastic shutdown in Shanghai in response to a relative handful of Covid-19 cases, China’s monetary authorities have eased domestic policy. But the effectiveness of this move is blunted by the strength of the yuan.

“One thing to watch, especially in the current feverish geopolitical environment, is if China is again ‘forced’ to devalue due to a weak yen,” Edwards writes in a research note. It will be remembered that the sudden fall of the yuan in 2015 caused a global mini-crash that spread to Wall Street.

Yet it is Japan itself that is suffering the most from its longstanding weak yen policy, argues William Pesek, a former esteemed Barrons colleague and now a prolific Tokyo-based journalist. The BoJ’s aggressive balance sheet expansion since 2013 under Kuroda — it’s now larger than Japan’s $5 trillion economy — has boosted gross domestic product and corporate profits. But it failed to lift productivity, innovation or wages.

Read more Up and down Wall Street: The inverted yield curve could send a false recession warning

“Two decades of the world’s most generous corporate welfare, compliments of a weak yen, have done the opposite,” Pesek writes acerbically in his latest Nikkei Asia column. “Why bother restructuring, recalibrating, reimagining or reviving the innovative spirits that


Apple,

Samsung Electronics, and


You’re here
what happens when the central bank supports you? »

Moreover, Japan even lags behind some developing countries, such as India and Indonesia, in producing tech unicorns. “While Masayoshi Son’s SoftBank Vision Fund invests heavily in startups from Bangladesh to Brazil, very few of its bets are in its home market,” he adds.

If currency depreciation were the path to prosperity, Argentina and Venezuela would be booming, Pesek points out. Yen weakness is a symptom of Japan’s decades-long sluggishness, not its cure, and certainly not a reason for the rise in Japanese stocks.

Write to Randall W. Forsyth at [email protected]

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