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On a Friday afternoon late last month — just after the Bank of Japan had signalled that it was in no rush to end the ultra-loose monetary policy it has maintained for two decades — the shares of three of Japan’s most celebrated corporate names closed at all-time highs.
Even in the days of the great 1980s bubble, Toyota, Honda and the construction machinery giant Komatsu had never reached those levels.
And it was no coincidence at all, said traders on the day, that the yen was simultaneously plumbing an 11-month low of ¥148.3 against the US dollar.
That was a level low enough to draw verbal intervention from the Japanese authorities, and to ignite market speculation that they might soon step-in with more direct action if the descent continued too far and too fast.
More surprising — and, to analysts, a signal of a fundamental market shift as Japan confronts the combination of long-absent inflation and a historically cheap yen — was the fact that shares in frozen food and refrigerated warehouse giant Nichirei also reached an all-time high that Friday afternoon.
Investors looking at Japan, from both outside and within, suggest equity strategists may need to re-evaluate the way the currency is interacting with the wider Japanese investment scene. The behaviour of Japanese households, and the decisions they make in relation to their ¥1,100tn (about $8tn) worth of Yen-denominated cash and deposits will be especially critical.
To market watchers, the idea that export titans like Toyota, Honda and Komatsu should benefit from extended weakness in the yen is nothing new. The earnings — and often share prices — of Japanese companies like these have tended to rise when the currency falls.
It is one of the reasons why the exporter-heavy Nikkei 225 stock average has risen 27 per cent since the start of the year, significantly outperforming the Dow Jones and S&P 500 indices in the US.
And many currency analysts, when looking at the persistently large interest rate differential between the still hawkish US Federal Reserve and the still ultra-dovish Bank of Japan, see few immediate reasons to expect the yen to rebound.
Investment flows are also adding to downward pressure on the yen.
Japanese corporates are, in the face of a shrinking domestic population and ever greater geopolitical pressures, investing heavily in the US and elsewhere around the world.
“The structural factors for yen weakness are still likely to continue in the long term,” says JPMorgan economist and head of Japan markets research Tohru Sasaki, adding that “even if the yen has ups and downs due to cyclical factors, the yen is likely to maintain a depreciation trend in the years to come.”
In the case of those three exporter companies and their all-time highs, the market is betting that the currency benefit this time around will be even greater than normal.
Each of the companies has based their earnings forecasts for the current financial year, ending next March, around a foreign exchange assumption of ¥125 to the US dollar. Given that the yen has not been at that level since April 2022, the prospect of strong upward earnings revisions is therefore high.
The euphoria in relation to Nichirei, however, arises from a different effect of the weak currency.
One of the main reasons that the Japanese authorities are concerned about losing control of the yen’s descent is that Japanese households are disproportionately exposed to the rising cost of imports.
About 60 per cent of food and 94 per cent of energy in Japan comes from abroad and has become more expensive as the yen has fallen.
As investors judge the situation, Japanese households, long used to either flat or falling prices, will now tighten their belts to make ends meet.
As they increasingly struggle to do so, says Mizuho Securities strategist Masatoshi Kikuchi, they may turn to cheaper frozen food — hence the share price surge for Nichirei and others in the same line of business. But the behaviour of Japanese households in coming months, argues Shusuke Yamada, Bank of America’s chief Japan foreign exchange and rates strategist, will be key.
Shortly after the shares of Toyota and the other exporters hit their all-time highs, Kazuo Ueda — the newly installed governor of the Bank of Japan — noted that he was seeing heightening inflation expectations and a change in corporate behaviour.
“In the past, it was hard for companies to hike prices,” he said. “But, as more and more companies began raising prices, those who were hesitant are starting to follow suit.”
The significance of this is huge.
As inflation expectations bed in to Japanese household financial calculations for the first time in many years, they will feel a growing need to hedge.
They will look for yield, says Yamada, and are likely to find it overseas — in particular the now higher yielding dollar: “If households finally start rebalancing out of cash, that will probably be negative for the yen.”
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