JPY trading more like the EUR - AmpGFX

Equity investors are bullish on Japanese equities as they can see Japanese monetary policy easing at its peak, even if it may be some time before it sees any significant unwind in policy easing, suggests Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“Traditionally, investors, including Japanese investors, used the JPY as a funding currency for bullish, leveraged global investment.  As such, JPY tended to be negatively correlated with global equities, including Japanese equities.  This negative correlation only increased during most of the quantitative monetary easing era since 2013, as the policy was designed to both boost asset prices and weaken the exchange rate.  And the weaker exchange rate tended to enhance equity value.”

“However, the negative correlation between the JPY and Japanese equities broke down in 2017, and more recently JPY is diverging from its yield spreads.”

“Investors in Japanese equities are more confident in a sustained recovery in Japan. And they are encouraged by corporate reform, including an increased focus on governance and return on equity.  They perceive BoJ policy easing at its peak, and in a long-term sense, the JPY is viewed as relatively cheap.  As such, equity investors in Japan are no longer routinely hedging their currency exposure.  Furthermore, there is much less interest in selling JPY to fund investments in global assets or pursuing short JPY carry trades.”

“In light of the recent experience of witnessing a strong rise in EUR in 2017, despite only a very gradual ECB monetary policy easing unwind, investors are now very wary of selling JPY.  Japan, like the Eurozone, has a significant current account surplus, and without capital outflow, including carry-trades in currency markets, equity-related capital inflow may continue to boost the JPY.”