Going into the Japanese market at this second is akin to catching “a falling knife,” Kelvin Tay, regional chief funding officer at UBS World Wealth Administration, instructed CNBC’s “Squawk Field Asia.”
His feedback come because the Nikkei 225 and the Topix prolonged their declines, falling previous 12% and into bear market territory. The Nikkei’s 12.4% loss was its worst day because the “Black Monday” of 1987.
“The one cause 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 feel they’re all getting out proper now on account 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 through 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.
Presently, the yen was final buying and selling at 144.82, its lowest degree 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 economic system and costs transfer in step with our projection, we are going to proceed to lift rates of interest,” in response to Reuters.
He additionally mentioned there was “nonetheless fairly a ways” earlier than its coverage price reaches a impartial degree that neither cools nor overheats the economic system.
Ueda additionally mentioned the 0.5% rate of interest degree — Japan has not seen that since 2008 — was not a barrier, and charges may go even greater.
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 positive aspects made by the market had been as a result of company restructuring efforts by the Tokyo Inventory Trade, “the principle driver was the Japanese yen.”
One issue why the yen has featured so closely in Japanese market is what is called the unwinding of the “yen carry commerce.”
When the yen was weak and rates of interest from the BOJ had been at zero or adverse, buyers would borrow in yen, and make investments the proceeds in greater yielding property.
Taking the central financial institution benchmark rates of interest as a information, an investor may 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 price 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 engaging, doubtlessly setting the stage for the yen to strengthen additional.
Tay expects the yen to achieve about 143 to the greenback, but when Japanese life insurance coverage corporations and pension funds begin repatriating extra yen again to Japan, the forex may go to 135 towards the dollar.
“So, sure, it [the yen] would possibly discover a degree, however at this cut-off date, the Japanese inventory market remains to be not engaging sufficient for me to really wish to go into.”
