Strategy
The Effects Of The Yen’s Decline - Expert View

Simon Somerville, manager of the Jupiter Japan Income Fund and
the Jupiter Japan Select (Sicav) Fund, shares his views on the
effects of the yen’s decline. Such a fall should accelerate the
turnaround in the Japanese economy, but a depreciating currency
is no substitute for long-term structural reform, he warns.
With the US dollar now buying more yen than it has done in over
four and half years, investors have been rushing to buy
shares in Japan’s major exporting companies on expectation that
profits and revenue will climb sharply as overseas demand for
their products improve, says Somerville.
It is quite likely that we will see Japanese exporters start to
revise earnings and sales forecasts upwards over the coming
months as the extent of the fall in the yen has, in Somerville’s
view, been much greater than anticipated.
This slump is perhaps the most visible result of what has become
known as Abenomics – a series of stimulus measures introduced by
Prime Minister Shinzo Abe to lift the Japanese economy out of
recession and a period of deflation that has lasted nearly 15
years. When Abe spelled out his economic policy, he
illustrated the need for coordinated action on three fronts:
monetary, fiscal and structural.
Championing a 2 per cent inflation target, Abe’s tough rhetoric
on the economy, both during his election campaign and afterwards
ignited the current rally in Japanese stocks. A stimulus
package worth 10.3 trillion yen in January has underpinned it
while the Bank of Japan’s massive bond-buying programme announced
in April under the stewardship of Haruhiko Kuroda has prolonged
it. Add to the mix, a series of tax breaks to boost wage growth
and employment and you have all the ingredients that have
propelled the benchmark Topix Index to its highest level since
September 2008, says Somerville.
The rally is underpinned by increasing evidence Abe’s policies
are having their desired effect. Household spending, for
instance, rose at its fastest pace in nine years in March and
tax-breaks aimed at encouraging companies to raise salaries
should help sustain sales.
The hunt for yield is a further consequence of the new measures
brought in by Abe. With yields on Japanese government bonds
effectively capped by the Bank of Japan’s massive monetary
stimulus scheme, domestic investors will increasingly have to
look elsewhere for a decent income stream.
Further gains for the Japanese stock market now lie in Abe’s
ability to fire the third arrow of structural reform. Specific
policies have yet to be announced but the key areas of focus are
likely to be increased labour market flexibility, greater female
and senior labour participation, trade liberalisation through
membership of the Trans-Pacific Partnership and the creation of
“national champions” through the relaxation of competition laws.
If these structural reforms are even partially successful, it is
not only individual companies that will profit but the entire
domestic economy, Somerville concludes.