Japanese stocks, which like the weak yen, are in a constant state of change, warning of disadvantages as costs rise – Domestic demand hits – Bloomberg

As the yen remains at its lowest level in 34 years, the Japanese stock market is beginning to become wary of the disadvantages of chronically weak yen.

The general view is that the weaker yen is beneficial for Japanese stocks overall, as it boosts profits in major manufacturing industries with large market capitalizations, such as automobiles and electronics, which are dominated by global companies.The manufacturing industry is part of Japan’s industrial structure. They have a large presence in the Japanese economy, accounting for one-fourth of the total, and the combined weight of transportation equipment, including automobiles, and electrical equipment in the Tokyo Stock Exchange Stock Price Index (TOPIX) exceeds 25% for just two industries.

However, despite the benefits that the weak yen brings to exports, it is also accumulating a negative impact on domestic consumption. From 2022 onwards, the yen will depreciate by 24% against the dollar. It is the weakest among the currencies of the 20 major countries and regions (G20), with the exception of Turkey and Argentina, which suffer from high inflation. As a result of the rapid depreciation of the yen, which took away purchasing power and led to sluggish consumption, land transport and retail stocks, which are highly dependent on domestic demand, remained sluggish despite the rise in consumption by foreign visitors to Japan, which reached record highs. ing.

The number of foreign visitors to Japan in March was 3.08 million, exceeding 3 million for the first time in a single month.

Kensuke Niihara, chief investment officer (CIO) for Japan at State Street Global Advisors, points out that there are winners and losers from a weak yen, adding, “It’s negative for consumers. If things go well, there is room for corporate profits to be positive, but it could bring even more disadvantages to consumers.”

actual, Bank of Japan The consumption activity index has declined for two consecutive quarters, and real consumption excluding foreign visitors to Japan from January to March of this year fell to the lowest level in the past two years.

Investors have so far turned a blind eye to the slump in consumption because they have assumed that, as a result of a series of high wage increases agreed upon during the spring labor union, consumption will gradually recover and outweigh the negative impact of the weaker yen. Regarding foreign exchange, there was also reading that if US monetary policy turns to lower interest rates in the coming months, the yen will likely appreciate and the dollar will weaken.

Highest growth in nominal wages in 8 months, 26th consecutive month of increase – good sign for Bank of Japan normalization

However, in the United States, as the economy remains strong, inflation has not fallen as much as expected, and expectations for an early interest rate cut are rapidly fading away. As of early morning on the 24th, in the foreign exchange market, the yen is trading at a weaker yen and stronger dollar level, with the possibility of breaking the psychological milestone of 155 yen to the dollar.

Rie Nishihara, chief Japanese equity strategist at JPMorgan Securities, said in a report that if the yen depreciates by more than 157 yen, higher import costs will offset wage increases, making it difficult for real wages to turn positive.

A depreciation of the yen exceeding 152 yen could be a negative factor for Japanese stocks – JP Morgan

There are already signs that the weak yen is weighing on stock prices in some domestic demand sectors. The TOPIX Land Transportation Index, which is comprised of railways, transportation companies, etc., had a year-to-date performance of -0.2% as of the 23rd, ranking second worst among 33 industries. It is well below the TOPIX’s 13% increase rate and below the 200-day moving average, which indicates investors’ long-term buying and selling costs.

The TOPIX retail index also rose 7.9%, falling short of the overall market rate of increase.In response to strong inbound consumption demand from foreign visitors to Japan, department store Mitsukoshi Isetan Holdings and Although some stocks such as H2O Retailing are doing well, just under 40% of the 194 stocks included in the index are negative.

Yasuhiko Kuramochi, market strategist at Mizuho Securities, points out that there is a risk that increased costs due to the weaker yen will reduce the recovery in domestic demand. Regarding retail stocks, he says, “The effects of price increases are coming to an end.We want to see if individuals become more frugal.”

Some believe that the impact of a weaker yen on pushing up inflation is currently limited. Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute, believes that at the current exchange rate, the rate of increase in the import price index will not rise sharply from the current rate of around 1.4%.

On the other hand, if the yen depreciates further, there is a possibility that there will be a growing expectation that the Bank of Japan will raise interest rates sooner.Although the Bank of Japan has said that it will not change its monetary policy to guide the yen, Governor Kazuo Ueda has said that if exchange rate movements are likely to have a non-negligible impact on wages and prices, monetary policy should be changed. It also states that this is a reason to take action.

The Overnight Index Swap (OIS), which reflects the outlook for monetary policy, incorporates the possibility of an additional 0.25% interest rate hike from September to October. State Street’s Mr. Niihara said that depending on exchange rate movements, “the Bank of Japan could be forced to change its policy, or there could be political momentum to do so.”

Related article

A series of demands from business leaders to rectify the yen’s depreciation are “going too far,” Niinami says – nearing 155 yen

Keidanren Chairman Tokura says the current depreciation of the yen has gone too far – the government and Bank of Japan should make the appropriate decision to intervene

The weak yen is a disaster for Japan, and we have no choice but to wait for overseas interest rates to fall – SMBC Nikko

High hurdles for Japanese companies’ financial results, fear of disappointing investors – Beware of rising costs

4 reasons why even historic interest rate hikes cannot save the yen, low-altitude interest rates and volatility resonate