Swiss private bank Julius Baer, together with other wealth managers, share their insights on the outlook for Japanese equities, amidst a stronger Japanese yen (JPY).

The rise in the yen's exchange rate hasn't prevented Julius Baer yet from taking a constructive position on the Japanese stock market this year. 

Louis Chua, equity research analyst Asia at Julius Baer, highlighted this week how the earnings season in Japan started off strong, with 72 per cent of companies beating consensus estimates and 68 per cent beating revenue estimates.

With a higher-than usual number of companies revising up their full-year guidance following the results, Chua expects high earnings visibility and strong earnings momentum to continue, supporting the recovery in Japanese equities, despite a stronger yen.

The yen has strengthened since the joint currency interventions by the US and Japan, with the dollar/JPY down to 157.80 as of 7 August from a recent high of 163.86 as of 28 July. “Historically, Japanese equities and earnings have fared well alongside a weaker yen, and vice versa,” Chua said. Although the yen has risen and the Bank of Japan of Japan is taking a hawkish view on monetary policy, Chua said the Nikkei 225 benchmark of Japanese stocks has continued to stage a healthy recovery from its July lows. He thinks this is a function of healthy earnings fundamentals.

Companies’ earnings guidance continues to assume a conservative dollar/JPY rate of 152, well below current spot levels, suggesting meaningful room for foreign-exchange market-driven earnings upside, Chua said. After the July correction, the Nikkei 225 trades at a forward price/earnings ratio (P/E) of 20.7x vs a recent high of 24x. With the Nikkei 225 expected to generate a forward return on equity (ROE) of more than 12 per cent, Chua maintains a positive view on Japanese equities on healthy earnings momentum and upside from continued structural reform.

David A Meier, economist at Julius Baer, noted that the recent dual-sided yen intervention is unlikely to strengthen the yen sustainably, as the underlying causes of yen weakness remain intact: an excessively loose monetary policy that keeps the rate disadvantage wide, with concerns about political influence amid fiscal expansion.

Causal factors
Masahiko Loo, senior fixed income strategist at State Street Investment Management, said the dollar/JPY move back towards 160 has been mainly driven by higher US Treasury yields and rising oil prices rather than a resurgence of speculative carry positioning.

“Markets will test the line, but after the coordinated US-Japan action, the risk-reward of treating the yen as a one-way funding currency is becoming less attractive. Traders who lived through the coordinated interventions of the 1990s know how painful it can be to fight policymakers with a political mandate,” Meier said.

Patrick Ho, chief investment officer, North Asia at HSBC Private Bank and Premier Wealth maintains his neutral stance on Japanese equities, Japanese Government Bond (JGB) and Japanese Yen (JPY). While Franklin Templeton Investment Solutions is staying bullish on equities, despite renewed inflation concerns, higher rates and geopolitical risk.

“The global macroeconomic environment appears relatively robust, led by the United States and Japan,” Franklin Templeton Investment Solutions said this week. “We retain an artificial intelligence (AI) tilt within our portfolios with overweight exposure to US, Japan and emerging market (EM) equities, where we see the most potential for growth. We are generally less optimistic toward markets with lower exposure to AI and technology, particularly those with sensitivity to energy and commodity prices.”