Falling Japanese yen most ‘textbook-driven’ FX move in 30 years, analyst says

The worst is not over for the Japanese yen – it could fall further in the coming months, according to Jesper Koll, director of financial services firm Monex Group.

“I think the parabolic overshoot is still on track, so I think we’re going to see 150, 160 at some point over the next two months,” Koll told CNBC’s “Street Signs Asia” on Wednesday.

The Japanese yen fell to its lowest level in 24 years on Wednesday and settled at 144.35 against the US dollar, the weakest since August 1998.

The currency has since retreated slightly and traded around 144 against the greenback earlier Thursday.

Koll said the currency depreciation is one of the most “rigorous” and “easiest” moves to explain because it’s “based on real fundamentals.”

It’s the “most textbook-driven forex move I’ve seen in 30 years,” he added.

Koll said “two powerful forces” will further weaken the yen: the widening interest rate differential between the United States and Japan and Japan’s trade and current account deficit.

Unlike the US Federal Reserve, which has raised interest rates more aggressively to control inflation, the Bank of Japan (BoJ) has taken a dovish monetary policy stance after many years of deflation.

Inflation would decrease the value of the yen by reducing its purchasing power.

“Inflation is expected to top 3% before the end of this year, above the central bank’s 2% target,” said Darren Tay, an economist at Capital Economics Japan.

Inflation at 3% is relatively low — inflation in the United States, for example, was 8.5% in July.

However, the BoJ “remains very firm in its position that it will maintain its ultra-accommodative monetary policy in order to stimulate inflation and support growth in Japan,” Tay said Thursday on CNBC’s “Squawk Box Asia.”

Koll agreed with this analysis, saying the likelihood of the central bank raising rates “is close to zero.”

The BoJ is “committed to a free market in currency markets” and has “no hard evidence” as to why it should raise interest rates, he said.

Asked about Japan’s inflation outlook for the coming months, Koll said the BoJ’s forecast for consumer price inflation next year could “fall back below 2%,” and it would be agree with this prediction.

The central bank said at the end of August that reaching 2% inflation would not be enough. On the contrary, “the end goal”, he added, is that “accommodative financial conditions facilitate higher corporate profits and improved labor market conditions, and thus generate a virtuous circle in which wages and prices are experiencing sustained increases” – and an easing of monetary policy would help it achieve this goal.

But a weaker yen isn’t necessarily a bad thing – it could help Japanese companies become more competitive. And that’s partly because global supply chains are expected to shift in Japan’s favor as more companies look to increase their imports from Japan.

1. Machinery manufacturing enterprises

“If you can’t buy from China anymore, you’re going to buy from Japan,” Koll said, recommending investors pay attention to Japanese machinery companies that would benefit from both yen depreciation and changes in the value chain. global supply.

Keyence, a company that makes factory automation equipment, will be a “huge beneficiary” of a weakened yen, he said.

Air-conditioning manufacturing company Daikin is another company investors should pay attention to, he added.

“It’s getting hotter and hotter all over the world… More and more homes are going to get air conditioners and that’s where Daikin is really leading the way.”

2. Tourism

The depreciation of the yen is also likely to attract more tourists to Japan who want to take advantage of its higher purchasing power, said Ryota Tanozaki, CEO of hotel chain Tabist.

Inbound travelers will have much more purchasing power due to the depreciation of the yen, Tanozaki said, noting he is positive on the weakening currency.

Japan has a “variety of unique assets” such as its cuisine, transportation system and traditions that would entice foreigners to visit the country at a cheaper price, he said.

Tourism spending in Japan has fallen significantly over the past two years, but Koll is optimistic that Japan will follow in Taiwan’s footsteps and resume visa-free entry for visitors from certain countries.

The Japanese government announced on Wednesday that it would further relax its Covid-19 travel measures and increase daily arrivals of foreign visitors.

Still, although rising tourist arrivals will help consumer spending in Japan, Tanozaki said rising energy prices remain a concern.

Companies in the utilities and food and beverage sectors will suffer the downside of a weaker yen, as these are the industries that rely heavily on imports, Koll said.

“I’m a bit concerned about the rise [prices] in oil and energy,” Tanozaki said. The depreciation of the yen as well as geopolitical tensions will be “problematic” for companies in the tourism sector as they are expected to bear higher utility costs with the influx of tourists. .