Japanese Yen Could Easily Strengthen Further, Which Isn't All Bad For Stocks

by: ValueWalk

During 2015, the yen became undervalued compared to the dollar on a purchasing power parity basis to an extent that it had never reached over the past 30 years. On June 5th, based on our PPP cpi differential model, the yen was a remarkable 32% undervalued compared to the dollar. The recent strengthening has improved how undervalued the yen is compared to the dollar but at 22.39% undervalued, the yen has much more room to run. Also, the yen isn't just undervalued against the dollar either. On a PPP basis, the yen is 7% undervalued against the euro and 13% undervalued against the Canadian dollar.

Japanese Yen vs. U.S. Dollar

To most investors, the idea that the yen could gain by 20% against the dollar and still be considered slightly undervalued is the final nail in the coffin for Japanese equities. It is generally believed that a stronger yen is terrible for Japanese stocks and foreign investors have been acting on this common belief. However, developed market Asian counter-cyclicals, especially growth counter-cyclicals, have actually tended to outperform other developed market equities in a strengthening yen environment over the past 15 years.

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