Japanese Stocks to Gain After Fresh Yen Weakness: Markets Wrap

Japanese stocks are set to gain after the yen weakened further, boosting the competitiveness of exporters and driving renewed selling in the currency. The Nikkei 225, which represents Japan's largest companies, has rallied alongside the dollar/yen exchange rate as reflation has taken hold in Japan (Chart 1).

The yen's depreciation has a positive impact on the competitiveness of Japanese exporters in global markets. This is because a weaker yen makes Japanese goods cheaper for foreign buyers, thereby increasing demand for these products. For instance, Toyota and Honda have been enjoying record profits due to the yen's slide, as they are able to sell more cars overseas at lower prices (Wong, 2024). Additionally, more than half of the firms on Japan's Topix index are exporters, and thus benefit from a weak currency (Wong, 2024). This is further validated by the fact that the Nikkei 225, which represents Japan's largest companies, has rallied alongside the dollar/yen exchange rate as reflation has taken hold in Japan (Chart 1).

However, yen weakness also presents risks for Japanese exporters. A weak yen increases the cost of imported goods, which can negatively impact Japanese households and domestic companies, particularly smaller ones that are more reliant on imports. This can lead to reduced consumer spending and slower economic growth (Bloomberg, MoneyWeek). Additionally, a weak yen erodes the returns of foreign investors in Japanese stocks. While the Topix index has gained 20% in yen terms, it has only gained about 7% in sterling terms (MoneyWeek).

Despite these risks, Japanese stocks are expected to gain after the fresh yen weakness. The weak yen is traditionally regarded as a boon for Japanese stocks, as more than half of the firms on Japan's Topix index are exporters, and thus benefit from a weak currency (Wong, 2024). The likes of Toyota and Honda are enjoying "record profits" on the back of the yen's slide (Wong, 2024).

Moreover, the weak yen has driven renewed selling in the currency, as investors borrow in yen at low interest rates and then park the cash in higher-yielding currencies for an easy profit. This carry trade can further weaken the yen, affecting both domestic and international pricing strategies (MoneyWeek).

In conclusion, while yen weakness presents both risks and opportunities for Japanese exporters, the positive impact on the competitiveness of exporters in global markets is expected to drive gains in Japanese stocks. However, investors should be aware of the potential risks, such as increased import costs and eroded returns for foreign investors, and monitor the situation closely.