Weak yen unlikely to end Japan's rally
Market take
Weekly video_20240513
Ben Powell
Opening frame: What’s driving markets? Market take
Camera frame
Twelve-month returns for the MSCI Japan are near 17% in U.S. dollar terms [as of May 6, 2024].
Title slide: Weak yen unlikely to end Japan’s rally
We don’t see the recent slump in the yen to 34-year lows against the dollar derailing this momentum.
Japan’s growth outlook remains rosy and corporate reforms are taking hold.
1: Central bank policy intervention
An apparent intervention may slow the slide in the yen, but ultimately its weakness is due to divergent Bank of Japan and Fed policy rates, in our view.
The yen started depreciating in 2022 as the Fed kicked off its rapid hiking cycle. Its fall accelerated in April as the BOJ asserted it would not rush to unwind its loose policy, while markets pared back their pricing of Fed rate cuts for this year given sticky U.S. inflation.
We believe the yen could recover once the Fed cuts later this year.
2: Cheaper goods and a stronger consumer
A weak yen affects Japanese companies and sectors differently. Manufacturers that face higher input costs may suffer.
Yet Japanese goods becoming cheaper for overseas buyers will benefit exporters. A stronger consumer could support some sectors on the back of wage gains.
Outro: Here’s our Market take
We see diverging monetary policy driving the slide in the yen but we don’t see it persisting. We stay overweight Japanese stocks given ongoing corporate reforms and eye opportunities created by structural shifts.
Closing frame: Read details:
www.blackrock.com/weekly-commentary.
A weak yen is unlikely to end the positive momentum in Japanese equities. The drivers of the recent rally remain, so we stay overweight Japanese stocks.
The S&P 500 neared its 2024 highs last week, supported by strong Q1 earnings. In Japan, authorities appear to have intervened to bolster a weak yen.
We’re eyeing U.S. CPI inflation data this week to gauge if it will keep coming in hot. We see U.S. interest rates staying high for longer given sticky inflation.
Twelve-month returns for the MSCI Japan are near 14% in U.S. dollar terms. We don’t see the recent slide in the yen to 34-year lows versus the dollar derailing this momentum. Why not? Japan’s growth outlook remains positive, corporate reforms are taking hold and rising wages can support consumer spending. Ultimately, yen weakness is mainly due to the gap between Bank of Japan and Fed policy rates. The yen could recover once the Fed cuts. We stay overweight Japan’s stocks.
Market backdrop
The S&P 500 climbed higher last week, approaching its 2024 highs. U.S. 10-year Treasury yields hovered around 4.50%. Given structurally higher interest rates, the onus has fallen on earnings to sustain U.S. equity strength. U.S. Q1 earnings have cleared a high bar thus far, showing strong results and signs of broadening. Japanese equities and 10-year government bond yields were flat. A historically weak yen, near 34-year lows versus the U.S. dollar, prompted suspected currency intervention.
We await U.S. CPI inflation data this week as some components have recently been higher than expected. We’re eyeing whether that will carry on. Supercore services inflation excluding food, energy and housing is particularly in focus as it will determine where inflation ultimately settles. We’re also watching core goods given their bumpy post-pandemic normalization. After softer-than-expected U.S. payrolls and wages, markets are again expecting a September rate cut.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of May 9, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
UK employment data
U.S. CPI
U.S. Philly Fed Business Index; Japan GDP data
China total social financing
Read our past weekly market commentaries here.
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