Having spent 35 years covering Japan, I am never surprised by the types of stock market falls we have witnessed in recent days, says James Salter, CIO and manager of the Zennor Japan Fund.
We have been warning that a stronger yen currency would initially cause indices to fall. What has been more difficult to gauge is the extent of the yen carry trade. The Bank of Japan has raised interest rates to 0.25 per cent at a time when the both the Federal Reserve and the Bank of England look to be moving towards an easing cycle. The yen has strengthened from over ¥160/$1 to a level below ¥150/$1.
The Bank of Japan has clearly come under a lot of pressure regarding imported inflation and this newfound ‘hawkishness’ is somewhat precarious. It comes at a time when the US economy looks vulnerable to weaker employment and consumption, and a Chinese economy that has so far failed to bounce back.
The recent stock market losers have included banks, insurance, autos and technology companies. These are all overcrowded trades that have seen foreigner’s pile into.
A stronger yen seems likely. This will lead to a bifurcated market where I suspect the “winners” of the last year bounce short-term but thereafter struggle. Many of these names are yen sensitive and exposed to the global economic cycle. Our portfolio, however, remains very domestically orientated. We will nibble at some existing names that have pulled back but are cognisant that the deleveraging may have further to go.
Our short-term concerns do not detract from our longer-term optimism on capital allocation change in Japan. We have been very aware of how cheap the yen is – and been positioned for it to strengthen structurally. It will take a little time for the market to adjust to what a stronger yen means for earnings.
It has felt to us that the market has been discounting some of the yen boosted earnings for some time. We do not expect this to have a radical impact on Japanese competitiveness or even earnings. We are having a market setback but nothing that changes our investment case for Japan based on a corporate governance revolution in Japan – just lower prices and better valuations.
By James Salter, CIO and manager of the Zennor Japan Fund
