Going into the Japanese market at this second is akin to catching “a falling knife,” Kelvin Tay, regional chief funding officer at UBS International Wealth Administration, advised CNBC’s “Squawk Field Asia.”
His feedback come because the Nikkei 225 and the Topix prolonged their declines, falling previous 7% on the day, and hovering near bear market territory.
“The one motive why the Japanese market is up so strongly within the final two years is as a result of the Japanese yen has been very, very weak. As soon as it reverses, you bought to get out proper and I believe they’re all getting out proper now because of that,” Tay mentioned.
The yen, which weakened to a 38-year low of 161.99 towards the U.S. greenback in June, reversed course in the course of the run-up to the Financial institution of Japan’s coverage assembly.
It strengthened sharply after the BOJ raised its benchmark rate of interest final week to round 0.25% and determined to trim its purchases of Japanese authorities bonds.
At present, the yen was final buying and selling at 144.82, its lowest stage towards the dollar since January. A stronger yen pressurizes Japanese inventory markets, that are closely dominated by buying and selling homes and export-oriented companies by eroding their competitiveness.
BOJ governor Kazuo Ueda had struck a hawkish tone throughout his press convention after the financial institution’s July 31 assembly, saying that “if the financial system and costs transfer according to our projection, we’ll proceed to boost rates of interest,” in line with Reuters.
He additionally mentioned there was “nonetheless fairly a long way” earlier than its coverage fee reaches a impartial stage that neither cools nor overheats the financial system.
Ueda additionally mentioned the 0.5% rate of interest stage — Japan has not seen that since 2008 — was not a barrier, and charges might go even larger.
The yen barometer
Tay mentioned the yen can point out whether or not the Japanese market will do effectively. Because the yen has strengthened, shares have declined, “there’s nonetheless much more stress on the Japanese inventory market, sadly,” he mentioned.
Whereas Tay acknowledged that some features made by the market have been on account of company restructuring efforts by the Tokyo Inventory Alternate, “the primary driver was the Japanese yen.”
One issue why the yen has featured so closely in Japanese market is what is named the unwinding of the “yen carry commerce.”
When the yen was weak and rates of interest from the BOJ have been at zero or adverse, traders would borrow in yen, and make investments the proceeds in larger yielding property.
Taking the central financial institution benchmark rates of interest as a information, an investor might have borrowed yen at a 0% rate of interest earlier within the yr, and invested the cash within the U.S., incomes an curiosity of 5.25%.
Now, with the U.S. Federal Reserve signaling fee cuts are on the desk and the Financial institution of Japan elevating charges, the curiosity differential between the 2 central banks will slim, making a “carry commerce” much less enticing, doubtlessly setting the stage for the yen to strengthen additional.
Tay expects the yen to succeed in about 143 to the greenback, but when Japanese life insurance coverage corporations and pension funds begin repatriating extra yen again to Japan, the foreign money might go to 135 towards the dollar.
“So, sure, it [the yen] may discover a stage, however at this time limit, the Japanese inventory market continues to be not enticing sufficient for me to truly wish to go into.”
