Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, said during a conversation with media representatives that currently going into the Japanese market in terms of symbolic comparison with other actions is similar to catching a falling knife.
The Nikkei 225 and the Topic continue to be on a downward trajectory. The corresponding indices fell by more than 12% and ended up in the territory of the so-called bear market. The decrease of the Nikkei 225 turned out to be the strongest since 1987.
Kelvin Tay says that the only reason for the significant growth of the Japanese market over the past two years is that the yen has been very weak. After the strengthening of the national currency of the Asian country, the situation changed and turned out to be on a trajectory in the opposite direction to the previous state of affairs.
In June, the yen fell to 161.99 against the US dollar. The corresponding indicator is the lowest in the last 38 years. The national currency of the Asian country changed the vector of its dynamic on the eve of the policy meeting of the Bank of Japan. The yen strengthened sharply after the local financial regulator raised its benchmark interest rate to around 0.25% last week and decided to trim its purchases of Japanese government bonds.
The yen was last trading at 144.82 against the US dollar. This indicator corresponds to the lowest level since January. The strengthening of the national currency of the Asian country is a factor of pressure on the Japanese stock markets, which are dominated by trading houses and export-oriented firms, which competitiveness is declining.
The governor of the Bank of Japan Kazuo Ueda last week, during a speech at a press conference following a meeting of the financial regulator, said that the implementation of the interest rate hike strategy will continue if the economy and prices demonstrate the dynamic corresponding to forecasts. In this case, the projections of the central bank of an Asian country are implied. Kazuo Ueda also said that the moment is still far away when the cost of borrowing will reach a neutral level that will neither cool nor overheat the economy.
The governor of the Bank of Japan says that the interest rate of 0.5% is not an obstacle, and the corresponding figure may be even higher.
Kelvin Tay said that the yen may indicate how well the Asian country’s market will do. In this context, the expert noted that as the national currency of the Asian country strengthened, stock indexes showed a decrease. At the same time, Kelvin Tay acknowledged that some success had been achieved as a result of the Tokyo Stock Exchange’s corporate restructuring efforts. The expert underlined that the main driving force of the mentioned result was the yen.
One of the reasons for the strengthening of the national currency of the Asian country was the unwinding of the yen carry trade. Investors borrowed in yen when the currency was weak and the Bank of Japan’s interest rates were zero or negative. The proceedings were invested in higher-yielding assets.
Taking the central bank benchmark interest rates as a guide, an investor could have borrowed yen at a 0% interest rate. The money was then invested in the United States, earning an interest of 5.25%.
Currently, the Federal Reserve is signaling a possible easing of monetary policy, which implies cutting interest rates. At the same time, the Bank of Japan is raising the cost of borrowing. The difference in interest rates between the mentioned financial regulators will decrease, as a result of which the carry trade will become less attractive. Also, in this case, a platform is likely to be formed to further strengthen the national currency of the Asian country.
Kelvin Tay expects the yen to reach about 143 per US dollar. At the same time, the expert warned that the corresponding figure could be 135 if Japanese life insurance companies and pension funds start repatriating more yen back to the Asian country.
Kelvin Tay says that the Japanese stock market is currently still not attractive enough for him to want to go into it.
As we have reported earlier, Japanese Stocks Demonstrate Rapid Fall.
