In recent times, concerns have been raised about the weakening yen and its diminishing advantages for the Japanese stock market. Hiromi Yamaji, the Chief Executive Officer of Japan Exchange Group, highlights the potential negative economic consequences that accompany the yen’s decline. This comes as the currency’s influence on the nation’s import costs, particularly concerning crucial energy resources like oil, becomes more evident. Furthermore, the yen’s role as a boon for manufacturers, including global automakers with extensive international operations, seems to be losing its potency.
The depreciation of the yen is, to some extent, a natural outcome of the growing interest rate disparity between Japan and the global market. However, the impact is being felt in various dimensions of the economy. Yamaji draws attention to Japan’s economic size, well-functioning markets, liquid securities, and a stable political and regulatory landscape as pivotal reasons for the nation’s stock market reaching a three-decade peak this year. Additionally, he highlights the country’s benefit from the reallocation of international funds from China, driven by geopolitical tensions involving Taiwan’s future and technology shifts in the semiconductor sector.
Yamaji, 68, expresses his confidence that Japan is well-equipped to handle an eventual rise in interest rates, even from the current near-zero levels. He anticipates that the Bank of Japan’s decision to raise rates will be absorbed by the stock market, signaling policymakers’ confidence in the economy’s stable inflation.
Notably, the yen’s value has slipped below the levels that prompted Japanese officials to intervene in the currency markets last September—this being the first instance of yen-buying intervention in over two decades. Market participants are closely monitoring whether Japanese authorities will signal their readiness for intervention once more, or if the Bank of Japan will accelerate its policy tightening efforts.
Yamaji asserts that the present exchange rate level is unfavorably low for the Japanese yen, suggesting a degree of concern regarding the currency’s weakened state.
Meanwhile, the Tokyo Stock Exchange has taken a proactive approach by urging companies with stock values below book worth to devise plans for enhancing their market value. This proactive stance is crucial in maintaining the sustainability of Japan’s stock market surge, as underscored by foreign investors such as hedge fund Man Group and strategists at Goldman Sachs Group.
However, critics contend that the pace of progress is falling short of market expectations. A significant 46% of firms listed on the Tokyo Stock Exchange still trade with a price-to-book ratio below one, according to Bloomberg data. Mizuho Securities analysts noted in July that foreign investors might be disappointed due to the lack of improvement measures mentioned in recent corporate governance reports.
Yamaji acknowledges the need for further improvement, assuming his current position as CEO in April after serving as an executive at Nomura Holdings.
Anticipating a potential shift in market dynamics, Yamaji envisions a significant change if Japanese retail investors increase their stock holdings next year. This comes as the government plans to expand the tax-exempt Nippon Individual Savings Account (NISA) program. Accelerating inflation in Japan has amplified the demand for stocks among households, as they grapple with rising costs of essentials like electricity and food. Companies that once hoarded cash during Japan’s stagnant years are now inclined to spend before prices escalate further.
Evidently, a surge in interest among individuals to invest in stocks is noticeable even within Yamaji’s own company. The fiscal year ending in March witnessed the number of shareholders in JPX doubling to approximately 135,000, even without new incentives for investors being introduced.
Yamaji concludes by acknowledging that this time, the inflationary pressure appears to be genuine and may significantly influence market trends.