Effects of depreciation of yen and appreciation of yen on investment in Japanese stocks

1. The US dollar is the most widely used in the worldKey currencyIt plays a central role in international trade and financial transactions. Thus, the dollar-yen exchange rate affects various economic activities not only in Japan but also in the global economy.

2. The total market value of the US stock market accounts for about 50% of the total market value of the global stock market. Trends in the US dollar and US stocks will also have an impact on the Japanese stock market.

3. Trends in the dollar to yen exchange rate are closely related to earnings forecasts and stock price evaluations of Japanese companies.

For investors, the value of their currency against the dollar is a very important indicator. The euro is also the currency traded after the US dollar, but in terms of direct ties and influence with the Japanese economy, the dollar to yen rate tends to attract more attention. Therefore, in this article, we will proceed on the assumption that the yen depreciates and appreciates against the US dollar.

If the number of people who want to buy US dollars over Japanese yen increases, the value of the US dollar rises and the price rises, in other wordsDepreciation of yen and appreciation of dollarIt will be. It indicates a state where the value of the Japanese yen falls relative to the US dollar.

When the yen depreciates, more yen is required when purchasing overseas products and services, but at the same time, the price competitiveness of exported goods increases when viewed from Japan,Contributing to improving the performance of export companiesI will do it. Increased price competitiveness means that when exporting goods from Japan to overseas, Japanese products can be obtained at a lower cost in foreign currency, making it easier for products made in Japan to sell overseas.

As yen becomes cheaper, the cost of purchasing overseas products and going on overseas trips rises, and living expenses increase. Japan not only has a low food self-sufficiency rate (38%) compared to other developed countries, but it also relies on imports from overseas for many things, starting with energy resources such as gasoline, so price increases will occur in various areas.

Even in corporate operations, procurement costs for raw materials purchased from overseas increase (because depreciation of yen is said to be disadvantageous to importing companies).

Since the high cost of raw materials is equivalent to an increase in costs, it can be seen from the formula above that profits cannot be maintained without some kind of ingenuity. Will the selling price be higher, will they change what can be purchased with the same budget, or will advertising costs be cut... Without such corporate efforts, it would be difficult to maintain, let alone improve, profits.

If fewer people want to buy US dollars than Japanese yen, the value of the US dollar falls and the price falls, in other wordsStrong yen and depreciation of dollarIt will be. An appreciation of the yen indicates a state where the value of the Japanese yen rises relative to the US dollar.

When the yen appreciates, overseas products can be purchased cheaply, and the cost of going on an overseas trip is also cheap compared to when the yen depreciates, so if you are a consumer, you may “have a sense of value.” However, the situation is unfavorable for Japanese export companies. When Japanese products are relatively expensive overseas compared to when the yen depreciates, the yen appreciates, and price competitiveness declines. Not only that, when foreign currency or dollar assets earned overseas are exchanged for Japanese yen, when the yen appreciates, it decreases compared to when the yen depreciates. For that reason,Export companies face the risk of deteriorating performanceI will.

Changes in the US dollar/yen exchange rate

The depreciation of the yen and the appreciation of the yenforeign exchange marketInFluctuations in supply-demand balanceIt is caused by Let's take a look at whether the current exchange rate is trending towards an appreciation of the yen or the depreciation of the yen.

Below is the US dollar/Japanese yen (USD/JPY) yearly chart as of 2024/3.

At your feetThe trend of depreciation of the yenIt continues. Abenomics began in 2012, and former Bank of Japan Governor Kuroda began quantitative and qualitative monetary easing in 2013. After that, the yen depreciated, and the exchange rate fluctuation for 5 years from 2016 to 2021, when negative interest rates were introduced, remained in the range of 100 to 120 yen per dollar, but a rapid decline of 45 yen or more per dollar can be seen in the 3 and a half years from 2021 to the present.

The trend of depreciation of the yen as of 2024/3 is mainlyThe widening interest rate gap between Japan and the USIt was caused byOutflow of funds from Japan to the United StatesI've been encouraging them. The Bank of Japan announced that it would lift negative interest rates on 2024/3/19, but Japan's low interest rate environment, which is expected to continue in the future, promotes investment in foreign currency (especially the US dollar), and the depreciation of the yen is progressing as a result.

The current depreciation of the yen is advantageous for Japanese export companies, but it has created an unfavorable situation for general consumers and importers. Even in our daily lives, the value of yen decreases due to the depreciation of the yen, and when the value of currency is further reduced due to inflation, we get a real double punch. This means that at the same face value (amount) as before, you will not be able to have the same experience as before, and you will not be able to get things of the same quality as before.

The depreciation of the yen has progressed rapidly over the past few years, but if we assume that the depreciation of the yen progresses further in the future, the value of the Japanese yen will drop if all assets are held in Japanese yen, and the overall value of assets denominated in Japanese yen will decrease. Therefore, if part of the assets are converted into foreign currency-denominated assets, it is thought that assets can be increased due to the influence of exchange rates, even if yen depreciates.

However, there are also the following risks with foreign currency-denominated assets.

Exchange rate fluctuation risk

Price fluctuation risk of the product itself

The depreciation of the yen will not necessarily continue

It is generally recommended to hold yen denominated assets and foreign currency-denominated assets in a well-balanced manner.

Consider the dollar and yen as an investment strategy in Japan

For example, for export-driven companies such as Toyota Motor Corporation, exchange rates have a direct impact on performance. The depreciation of the yen not only brings overseas price competitiveness to Toyota automobiles, but it also directly leads to an increase in earnings because it works advantageously when converting foreign exchange earnings overseas into yen. According to materials published by Toyota in the past,The impact of the depreciation of 1 yen on annual operating profit will be on the scale of tens of billions of yenIt is shown.Exchange gains obtained from the depreciation of the yenis an important factor that greatly influences Toyota's performance.

As you can see from this case,Investment decisions that take into account trends in the dollar and yen are one of the important points when investing in Japanese stocks. In particular, export companies and companies that are highly dependent on imports are sensitive to fluctuations in the dollar and yen, and they also have a significant impact on business results, so it is necessary to keep a close eye on exchange rate fluctuations when planning investment strategies.

Depreciating yen stockswithStocks that appreciate yenUnderstanding, formulating investment strategies according to each situation, and considering diversification of stocks at the time of purchase is also important from the viewpoint of pursuing investment performance and risk hedging. In the current environment where the yen depreciates, export companies, foreign demand, and stocks of companies that are expected to increase foreign tourists (inbound related) will be advantageous. If it completely reverses and the yen appreciates, it is a good idea to focus on stocks of imported companies and companies that benefit from improvements in domestic demand and the purchasing power of domestic consumers.

Depreciating yen stocks

Stocks that appreciate yen

Here, it is defined as an enterprise where the appreciation of the yen works advantageously.

Factors that cause exchange rate fluctuations

Exchange rates constantly fluctuate due to the balance between supply and demand, and there are various factors behind this. The main factors include interest rate differences in each country, economic growth rates, statements from important people, political factors, trade balances, social and economic trends, and the international situation. It's hard to understand everything at once, so this time we'll focus on the interest rate difference between Japan and the US.

Generally, currencies from countries with high interest rates tend to be bought more easily compared to currencies from countries with low interest rates. This is because those who invest in currencies with high interest rates can aim for greater returns. For example, when interest rates in the US rise, funds seeking returns flow into the US dollar, leading to a “depreciation of the yen and appreciation of the dollar.”

Higher profits can be expected when holding or managing a currency with a high interest rate, so investors sell currencies with low interest rates and buy currencies with high interest rates. As a result, the movement to buy US dollars intensifies, leading to “depreciation of the yen and appreciation of the dollar.” To explain more clearly, let's take a look at an example of simply making a foreign currency deposit.

For example, if you deposit in Japanese yen, the interest rate is 0%, and if you make a deposit in US dollars, the interest rate is 3%, then if you manage 1 million yen for 1 year, even though the Japanese yen remains 1 million yen 1 year later, the US dollar will increase to 1.03 million yen after 1 year. (*Exchanges and taxes are not taken into account.)

Which currency would you like to increase your money in? When asked, most people would answer the US dollar, which is the currency with the higher interest rate. As a result, the number of people who “want to manage assets in US dollars rather than Japanese yen” will increase, and investment funds will flow into US dollars. like this,There is a tendency that currencies with higher interest rates are easier to buy compared to cheaper currencies。

Interest rates are determined at monetary policy meetings held by each country's central banks. It is the “Bank of Japan Monetary Policy Meeting” held by the Bank of Japan, and the “FOMC” held by the Federal Reserve in the case of the United States. Since Japan is approaching a “world with interest rates,” and the United States is approaching a phase of steering towards monetary easing, monetary policy trends in 2024 are a must-see for investors. Make use of moomoo's economic calendar and make sure you don't miss these meetings!

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(Written 2024/3/28)