Author: Shi Yin
In April, a friend from the domestic financial circle came to Tokyo.
During the conversation, I asked him about his impression of the Japanese economy.
He said that the Japanese economy is setting a number of historical records in terms of data: the Nikkei hit a new high of 41,000 points; Housing prices have also returned to the highs of the bubble era in 1991; Prices have bid farewell to nearly half a century of deflationary slumps; The Bank of Japan also said goodbye to 17 years of interest rate cuts and a decade-long YCC; Everything is showing signs of beginning to regain the "lost thirty years".
At the same time, he also revealed to me that the domestic financial circle is closely watching the movements of the Japanese economy, where will the yen assets go?
How can investors adjust their portfolios to the new market environment?
I hope there will be more exchanges and communication to give investment advice.
In March 2024, the Bank of Japan finally announced an interest rate hike for the first time in 17 years after eight years of negative interest rate policy, raising the benchmark interest rate from -0.1% to 0-0.1%, which not only ended the era of negative interest rates, but also served as a bellwether for the future direction of yen assets.
At the same time, the Bank of Japan (BOJ) has also decided to end its long-term and short-term yield curve control (YCC) policy and stop buying exchange-traded funds (ETFs) and real estate investment trusts (REITS).
However, the purchase of Japanese government bonds will continue to be about the same as before.
Bank of Japan Main Store
The Bank of Japan ended its negative interest rate policy since 2016 and normalized its monetary policy.
Behind this decision is a profound reflection of the state of the Japanese economy and a positive response to future inflation expectations.
From the basic principles of economics, we can know that the value of a commodity is closely related to its scarcity, and if the yen is considered a commodity, then the interest rate is the pricing of the commodity.
The benchmark interest rate has turned from negative to positive, which means that the value of yen assets has begun to spill over.
Due to the side effects of "Abenomics" and the frenzied interest rate hikes in the United States, the performance of the yen in the past three years can almost be described as "halved".
On April 29, the yen fell below 160 against the US dollar, falling to a 34-year low, with a cumulative decline of more than 50%.
The yen briefly fell below 160 against the dollar
This has led some domestic investors to buy the yen, but how feasible is this idea?
Theoretically, a country's interest rate has the most direct impact on the fluctuation of the exchange rate, and the fundamental reason for the depreciation of the yen against the dollar is the widening of the interest rate differential between the United States and Japan, that is, the negative interest rate policy of the Bank of Japan has a direct impact on the yen exchange rate.
But why did the Bank of Japan accept a negative interest rate policy, and why did the yen fall instead of rising?
An important reason is that the Bank of Japan has no expectation of sustained interest rate hikes, and despite the end of its negative interest rate policy, the Bank of Japan has maintained an accommodative monetary policy tone.
Another important reason is the problem of "negative equity" in "Abenomics", due to the long-term monetary easing, the Japanese government bond is seriously overissued, and the size of the national debt is 1,300 trillion yen, which is almost 2.5 times the GDP of Japan.
This distortion makes Japanese government bonds easy to be sniped by overseas investment banks, and in order to defend Japanese government bonds, the Bank of Japan has to "abandon the car to protect the handsome", and to a certain extent, it will tolerate the depreciation of the yen and abandon the exchange rate to protect the government bonds.
The third important reason is that Japan has had a trade deficit for three consecutive years, and as an important factor affecting the exchange rate, the foreign trade deficit also determines that the future recovery of the yen will be very difficult.
This, coupled with Japan's abandonment of its diplomatic stance of neutrality, has led to the disappearance of the yen's function as a safe-haven currency.
It can be said that the future correction of the yen can only wait for the direction of the Fed's monetary policy after the US election in the third quarter, and can only wait for the Fed to start the process of cutting interest rates.
In the meantime, the Bank of Japan can only "buy time" by personally intervening in the exchange rate market and dumping dollar reserves in the market, and as long as it survives until the Fed cuts interest rates, the yen may rebound and appreciate in a real sense.
Fed
Of course, due to the long-term low-interest rate financial environment, international investors tend to invest overseas after raising low-interest rates in Japan, which is equivalent to using the low-interest yen to provide liquidity to the world.
If the Bank of Japan further adjusts its monetary policy and increases financing costs, the flow of these foreign exchange carry funds may change, which will also affect the direction of the yen exchange rate.
Due to the relatively small size of yen-denominated foreign exchange transactions, according to the Bank for International Settlements (BIS) data in 2022, the size of yen-denominated foreign exchange transactions accounts for about 16.7% of the world, second only to the US dollar (88.5%) and the euro (30.5%).
However, the yen is not necessarily as aggressive against the dollar as it is against the dollar, and with the reduction of profits from transaction costs, it is not a good investment strategy for RMB investors to buy the yen now.
Judging from the trend of the yen-renminbi exchange rate in the past two decades, the depreciation of the yen against the renminbi has a "ratchet effect", that is, it is easy to depreciate, but it is difficult to appreciate.
Once the value has depreciated to a low level, it is very unlikely that it will return to the high level before the devaluation.
(1) The first depreciation of the yen against the renminbi began in 1995, and has been depreciating from 8.9 yuan/100 yen in 1995 to 6.46 yuan/100 yen in 2007;
(2) After a short pullback, the second wave of depreciation was from 8.11 yuan/100 yen in 2011 to 5.11 yuan/100 yen in 2015;
(3) After the second round of short-term correction, the third wave of depreciation was from 6.33 yuan/100 yen in 2019 to 4.7 yuan/100 yen now.
The yen exchange rate from 1980 to the present
It can be seen that the starting point of each depreciation of the yen against the yuan is constantly decreasing, and the end point of each correction is also constantly decreasing, and these are only the comparison of the denomination value of the currency.
The fundamental reason for this situation lies in the contrast between the national forces of China and Japan.
For investors who want to buy the bottom of the yen, if it is only a short-term fast in and out, the possible range of the yen's pullback against the yuan is around 5.5-5.9, and the possibility of returning to the era of 6 is very slim, and the profit margin of the yen is not large.
If you want to invest for the long term, it may not be recommended, because the depreciation of the yen is more severe from the perspective of purchasing power.
In this round of the bull market in the Japanese stock market, Warren Buffett is the biggest winner.
As early as three years ago, when the Nikkei index was still at 28,000 points, Buffett began to lay out Japan, but in fact, he didn't pay a penny himself, just borrowed bonds issued by Japan, and there was almost no interest.
Warren Buffett is very shrewd to invest all his money in the hands of Japan's five major trading companies, covering all the clothing, food, housing and transportation of the Japanese.
In 2022, due to the unstable world situation, Japan's inflation rate, which has not been shaken for 30 years, also miraculously began to rise.
In 2023, Warren Buffett announced in a high-profile manner at the shareholders' meeting that he had laid out the five major trading companies in Japan, and the Nikkei index soared, and by the end of 2023, Buffett's stock income in Japan was equivalent to nearly 60 billion yuan, with a yield of about 61%.
In 2024, the Nikkei index will break through 41,000 points, setting a new all-time record.
Even more exciting is yet to come, as the yen has depreciated by nearly 50% against the dollar in three years, Warren Buffett has used the dollar to buy yen to pay off the debt, and the debt that used to be $10 can now be repaid for only $5.
This wave of operations is a classic, enough to be written in a textbook.
Warren Buffett
So, is it still possible to follow up on investing in the Japanese stock market now?
This may be a little risky.
In fact, since the bursting of Japan's bubble economy in the 90s of the last century, Japan has been facing great pressure of deflation for a long time, and the economy has been sluggish.
In order to save the economy, the Bank of Japan has implemented a series of unconventional monetary policies, including quantitative easing (QQE) in 2013, negative interest rates in February 2016, and long-term and short-term yield curve control (YCC) in September 2016.
It aims to stimulate the economy by lowering borrowing costs, increasing market liquidity, and driving moderate inflation, but has had little effect.
The prolonged ultra-loose monetary policy environment has not effectively addressed the structural problems of the Japanese economy, but may have contributed to the Bank of Japan's asset bubble and rising debt levels.
However, in recent years, this situation has begun to change, and inflation in Japan has begun to rise.
In 2022 and 2023, Japan's CPI will be 2.5% and 3.2% year-on-year, respectively, and the CPI will reach 2.2% year-on-year in January 2024, exceeding the Bank of Japan's policy target of 2% for 22 consecutive months.
The Japanese stock market benefited from direct market intervention during the Bank of Japan's prolonged negative interest rate policy, especially through the purchase of Japanese ETFs and REITS, which prevented the Nikkei from collapsing.
With the end of negative interest rates, the Bank of Japan (BOJ) has stopped buying Japanese stock ETFs and REITS, and the market's expectations for further easing of the Bank of Japan have cooled, and the Japanese stock market may face considerable adjustment pressure in the short term.
The Nikkei hit a new high
It is possible that the long-term trend of the Japanese stock market will be more influenced by macroeconomic conditions.
(1) As the Japanese government pushes for structural reforms, those industries and companies that can benefit from the reforms may also be bright spots for investment.
(2) If the overall situation of the Japanese economy recovers steadily, coupled with the virtuous cycle of rising prices and expected wage increases, cyclical investment strategies will gradually attract market attention, which will be conducive to the growth of the Japanese stock market.
(3) In addition, the Japanese government is promoting the Japanese family wealth doubling plan, and from 2024, the new NISA of the individual tax-free investment account will be made permanent, and the investment limit of the account will also be increased from 1.2 million yen to 2.4 million yen per year, that is, the tax exemption limit will be expanded while the tax holiday period is no longer limited.
This measure will cause a lot of savings in Japan to pour into the stock market.
According to AllianceBernstein's analysis, even a relatively modest reallocation of only 2% of assets to equities could bring $150 billion in inflows to the equity market.
If this happens, it will have a significant impact on Japanese stocks, after all, the inflow of funds from overseas investors into Japanese stocks in 2023 is less than half of that amount.
In the long term, conservative estimates will drive the Nikkei by more than 25%.
However, in the short term, the early bull market in the Japanese stock market has gone too quickly, and an adjustment period will inevitably be needed.
In fact, my view is reflected in the recent performance of the Nikkei, which has fallen back to 38,236.07 points as of May 2, having been correcting for some time.
The Nikkei pulls back
Another reason why the Japanese stock market is not optimistic in the short term is that since 2023, it has driven Japanese stocks to continue to rise, exceeding 40,000 points, a record high, and the biggest contribution is the pursuit of overseas funds.
According to the data, foreign investors hold about 30% of the shares of Japan's TOPSE-listed companies, making them the largest holders.
This shows that foreign investors play an important role in the Japanese stock market.
Many of these overseas investors are borrowing the yen to promote the Japanese stock market, and with the expectation of U.S. interest rate hikes coming to an end and the germination of Japanese interest rate hike expectations, overseas investment funds will become a destabilizing factor for the Japanese stock market.
To sum up, investors investing in the stock market need to pay close attention to the economic dynamics of Japan.
For investors who invest in individual stocks, considering the valuation level of the Japanese stock market, investors should carefully assess the value of individual stocks, and pay attention to market dynamics, and pay attention to those companies with stable cash flows, low debt, and good governance structures, so as to adjust their investment strategies in a timely manner.
(The above analysis is for reference only and does not constitute investment advice)