22 April 2019
A weaker yen is typically good for Japanese equities but its benefit to the economy is more questionable. Photo: Reuters
A weaker yen is typically good for Japanese equities but its benefit to the economy is more questionable. Photo: Reuters

Why Japanese equities are outstripping US stocks

About US$63 billion of funds are estimated to have flowed into the US stock market since Donald Trump won the election.

While US equities have been doing very well, the “Trump effect” is even more obvious in Japan.

As the yen weakened amid a strong dollar, Japanese equities advanced more than 8 percent in past month, better than the US and European market.

The yen and Japan’s equities typically moved in opposite directions in the past. As dollar strength is expected to continue in the Trump administration, further downside of the yen is in store, which augurs well for a stronger Japanese stock market.

The upside of the Nikkei index is expected to be about 10-20 percent.

Nonetheless, whether a weak yen can truly revive Japan’s economy is a different question.

Many big corporations have relocated factories to Asia and emerging markets or even North America.

A weaker yen will not bring as much stimulus to Japanese exports and its gross domestic product as before.

On the other hand, a weaker yen will push up raw material prices and could badly erode the profitability of Japan’s small and medium-sized enterprises.

Investors should also watch out for a possible reversal of the Trump effect.

The Japanese yen has tumbled more than 12 percent against the dollar since Trump’s victory, with the dollar soaring to a 14-year peak.

If Trump tries to weaken the dollar for fear that its strength could pose a threat to the US economy, that could negatively impact Japanese equities.

Meanwhile, as a weaker currency has benefited Japanese equities, the situation is different in China.

The Chinese yuan has tumbled 6 percent against the US unit year to date, falling more than the euro and the yen but the stock market remains lackluster.

Apparently, a slew of China factors have been putting downward pressure on Chinese equities, including the outflow of capital and a clampdown on insurers buying stocks with improper funds.

Hong Kong and the emerging markets in general also performed badly. A turnaround will have to wait until valuations hit some key support levels or US interest rates peak out.

This article appeared in the Hong Kong Economic Journal on Dec. 23

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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