The Japanese stock market plunged in the first half of August, with the TOPIX posting historic declines of -6.1% on August 2 and -12.2% on August 5, briefly exceeding -20% since the beginning of the month. The catalyst for the sharp decline in stock prices was the sudden appreciation of the yen in the foreign exchange market. The interest rate differential between Japan and the U.S. narrowed as long-term interest rates in the U.S. trended lower, and the dollar-yen exchange rate, which had been in the 160 yen/dollar range, fell to the low 140 yen/dollar range, further supported by the Bank of Japan's interest rate hike.
Fortunately, the stock market soon regained its composure, rising 23% from the low to the end of the month, while the dollar-yen exchange rate recovered only 3%. The downward trend in US interest rates is becoming clearer, as Fed Chairman Jerome Powell made clear on August 23rd regarding monetary policy adjustments, and we will need to watch closely for changes in the market situation.
Monetary easing in the U.S. changes the way asset values are viewed around the world, and while undervalued stocks have performed well in Japan during the U.S. monetary expansion since 2021, this situation could change, and blue chip and growth companies could be repriced.
In addition, the weakening of the yen since 2021 has greatly benefited the performance of large global companies, but this trend could be reversed if lower U.S. interest rates lead to a stronger yen. The average exchange rate last year and the assumed exchange rate for the current fiscal year are estimated to be around 145 yen to the dollar. If the yen appreciates from this level, export-oriented companies will see a decline in profits compared with last year's performance or their initial forecasts, and there is concern that the direction of short-term performance will be weak. However, with the purchasing power parity exchange rate at ¥108 (*1), there does not seem to be any concern about serious damage to price competitiveness at the level of ¥140 per dollar.
The positive impact of the strong yen scenario will be felt by domestic demand-driven companies, which will benefit from lower prices for imported raw materials. As the current labor shortage in Japan triggers a shift in consumers' deflationary mindset and understanding of rational price increases, companies with strong product competitiveness will be able to expand their profit margins more easily.
While we do not make investment decisions based solely on the macroeconomic environment, we constantly monitor changes in the market environment as they affect the performance and valuation of individual companies. For the time being, we will manage our investment activities by closely monitoring changes in the market environment following the market decline.
(1*) Statistics(GMVI ・PPP) | Institute for International Monetary Affairs (iima.or.jp)
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