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

What exactly is the state of depreciation of the yen and appreciation of the yen? I will explain why understanding exchange is important when investing in stocks.

Why you should keep a close eye on the dollar-yen exchange rate even when investing in Japanese stocks

1. The US dollar is the most widely used key currency in the world and 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.

The depreciation of the yen and the appreciation of the yen mean that the value of the Japanese yen fluctuates in the exchange market

What is depreciation of yen

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, that is, the yen depreciates and the dollar becomes higher. 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 from Japan's perspective, contributing to improving the performance of export companies. 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.

What impact will it have on our lives in Japan?

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).

• Profit = Sales - Expenses

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.

What is the appreciation of the yen

If fewer people want to buy US dollars than Japanese yen, the value of the US dollar falls and the price falls, that is, the yen appreciates and the dollar weakens. 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 this reason, export companies face the risk of deteriorating business performance.

Why do we mention “export companies” so much when talking about the depreciation of the yen and appreciation of the yen? Some of you might be wondering. Simply put, the reason for this is that there are many export companies among stocks that have a high degree of contribution to the fluctuation range of the Nikkei Stock Average, which is a stock price index representing Japanese stocks.

Changes in the US dollar/yen exchange rate

The depreciation of the yen and the appreciation of the yen are caused by changes in the supply-demand balance in the foreign exchange market. 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.

Currently, the depreciation trend of yen 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 depreciation trend of the yen as of 2024/3 was mainly due to the widening interest rate difference between Japan and the US, which encouraged the outflow of funds from Japan to the United States. 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 data published by Toyota in the past, it is shown that the impact of the depreciation of 1 yen on annual operating profit will be on the scale of tens of billions of yen. Exchange gains obtained from the depreciation of the yen are an important factor that greatly influences Toyota's performance.

MOOMOO NEWS:Expected exchange rates for export companies benefiting from a weak yen

As can be seen from this case, investment decisions that take into account trends in dollars 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.

Understanding yen depreciation stocks and yen appreciation stocks, 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

• $Toyota Motor(7203.JP)$Since automobile exports are the core business, the depreciation of the yen boosts profits.

• $Sony Group(6758.JP)$The electronics products and entertainment business is expanding globally, and the depreciation of the yen contributed to improving business performance.

• $Fanuc(6954.JP)$Since robots for the manufacturing industry, such as machine tools, are exported to the world, the depreciation of the yen will lead to an increase in profits.

Stocks that appreciate yen

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

• $Nitori Holdings(9843.JP)$As import costs decrease, it becomes easier to make profits due to the appreciation of the yen.

• $Suntory Beverage & Food(2587.JP)$Since the cost of purchasing raw materials and products from overseas falls, it leads to stable domestic prices and improved profitability.

• $ANA Holdings(9202.JP)$Aircraft procurement costs and crude oil costs have decreased. It is also conceivable that demand for overseas travel will be strong during high times.

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.

• Japan-US interest rate difference

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. As you can see, there is a tendency that currencies with higher interest rates are easier to buy compared to cheaper currencies.

I gave an explanation focusing on interest rate differences as a specific example, but interest rate differences are not the only cause of exchange rate fluctuations. For example, as a brand new material,Exchange Interventions by AuthoritiesThere are also concerns about that. Many factors are intertwined in a complex manner, so it may seem difficult at first, but let's learn little by little!

When and where are interest rates determined?

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!

Summarize

The depreciation of the yen means that the value of the Japanese yen falls, which is advantageous for Japanese export companies. Conversely, an appreciation of the yen indicates an increase in the value of yen, which is advantageous to importers and disadvantageous to export companies. Let's grasp the economic impact of the depreciation of the yen and the appreciation of the yen and make use of it in investment strategies.

The reason why understanding exchange rates is important in stock investment is that fluctuations in exchange rates directly affect the performance of Japanese companies, and this is reflected in stock prices.

Since the US dollar is widely used in international trade and financial transactions as the key currency, the dollar-yen exchange rate deserves special attention. Interest rate differences between Japan and the US can be cited as one of the factors that cause the dollar to yen to move. Don't miss the monetary policy meeting to decide interest rates.

(Written 2024/3/28)