Japan's Yen Weakness Has Changed The Competitive Landscape

Jul. 21, 2022 9:53 AM ETDFJ, DXJ, FXY, JYNFF, YCL, YCS3 Comments
WisdomTree profile picture
WisdomTree
4.64K Followers

Summary

  • After a bold move from ¥103 to ¥138 per dollar in less than two years, suddenly the Japanese yen is at a weakness level not seen since 1998.
  • Dollar-yen isn’t the only pair that matters. There is also a moment of truth happening right now between the yen and the Chinese yuan.
  • Japan’s TOPIX 500 offers a spread of 737 basis points (bps) over near-zero yielding JGBs, considerably more than the 161 bps spread offered by the S&P 500.

Global epidemics and economic impact

Ca-ssis

By Jeff Weniger, CFA

We are living through another chapter in the decade-old currency wars—and Japan is winning.

After a bold move from ¥103 to ¥138 per dollar in less than two years, suddenly the Japanese yen is at a weakness level not seen since 1998.

The yen’s collapse is even more remarkable when you consider that Japan’s consumer price inflation was 2.5% over the last year—a far cry from the 9.1% rate in the U.S. (figure 1).

Figure 1: Japanese Yen per U.S. Dollar

Figure 1_Japanese Yen per U.S. Dollar

Dollar-yen isn’t the only pair that matters. There is also a moment of truth happening right now between the yen and the Chinese yuan.

Each country is the other’s largest regional trade rival, so it’s notable that the yen is attempting to break through ¥20.56 per Chinese yuan, which would mark uncharted weakness for Japan’s currency (figure 2).

It has created a situation in which Japanese corporations are becoming increasingly price-competitive against companies based in China.

Figure 2: Japanese Yen to Chinese Yuan Exchange Rate

Figure 2_Japanese Yen to Chinese Yuan Exchange Rate

Unlike the U.S., which may have to spend the next few years contending with a housing market that appears to be rolling over, Japan’s speculative juices found their ugly end over three decades ago (figure 3).

Figure 3: Japan’s Land Prices Are at 1983 Levels

Figure 3_Japans Land Prices Are at 1983 Levels

Interestingly, U.S. residential property prices appreciated more in the last 11 years than Japan’s did in the final 11 years of its bull market, which were from 1980–1991 (figure 4).

Figure 4: U.S. Residential Property Price Appreciation, 2011–2022, Overlayed on Japan

Figure 4US Residential Property Price Appreciation 20112022 copy

But because asset prices in the U.S. have melted up, now we have a relative value set-up that favors Japan from a “TINA” framework.

The acronym means “There Is No Alternative” available to investors beyond just biting their tongue and buying up stocks, because you couldn’t—past tense—find any yield in U.S. bonds. Though the TINA arithmetic has faded in the U.S. because of rising rates, Japan’s bond yields refused to follow along, owing to the country’s central bank bond purchases (figure 5).

Figure 5: 2-Year Government Bond Yield

Figure 5_2-Year Government Bond Yield

Try this exercise: make a list of all S&P 500 stocks that have an earnings yield that is at least 10 percentage points higher than the yield on two-year Treasuries.

There are 38 such companies.

In Japan, if you run the same exercise on the TOPIX 500, the screen comes up with 133 stocks that have earnings yields that are 10 points higher than two-year JGBs (figure 6).

Figure 6: Number of Index Members with Earnings Yields More than 10% Higher than Domestic 2-Year Government Bonds

Figure 6_Number of Index Members with Earnings Yields

Figure 7 shows another stock-to-bond comparison: the broad market earnings yield gap over 10-year sovereigns. Japan’s TOPIX 500 offers a spread of 737 basis points (bps) over near-zero yielding JGBs, considerably more than the 161 bps spread offered by the S&P 500.

Figure 7: Stock Market Earnings Yield Minus 10-Year Government Bond Yield

Figure 7_Stock Market Earnings Yield Minus 10-Year Government Bond Yield

We have two Japan ETFs, one that hedges the yen and one that does not.

If you want to avoid owning the stocks in yen, the one to review is the WisdomTree Japan Hedged Equity Fund (DXJ).

For investors that want Japanese stocks without the currency hedge, consider the WisdomTree Japan SmallCap Dividend Fund (DFJ).

Important Risks Related to this Article

DXJ: There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. The Fund focuses its investments in Japan, thereby increasing the impact of events and developments in Japan that can adversely affect performance. Investments in currency involve additional special risks, such as credit risk, interest rate fluctuations, derivative investments which can be volatile and may be less liquid than other securities, and more sensitive to the effect of varied economic conditions. As this Fund can have a high concentration in some issuers, the Fund can be adversely impacted by changes affecting those issuers. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

DFJ: There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments on smaller companies or certain sectors increase their vulnerability to any single economic or regulatory development. The Fund focuses its investments in Japan, thereby increasing the impact of events and developments in Japan that can adversely affect performance. This may result in greater share price volatility. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Jeff Weniger, CFA, Head of Equity Strategy

Jeff Weniger, CFA serves as Head of Equity Strategy at WisdomTree. In his role, Weniger helps to formulate the firm’s stock market outlook by assessing macro and fundamental trends. Prior to joining WisdomTree, he was Director, Senior Strategist at BMO, where he worked in the office of the CIO from 2006 to 2017. He served on the firm’s Asset Allocation Committee and co-managed the firm’s ETF model portfolios for both the U.S. and Canada. In 2013, at the age of 32, Jeff was chosen as the youngest member of BMO’s Global Investment Forum, which collected the firm’s top global strategists to formulate the firm’s official long-term outlook for investment trends and markets. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He has been a CFA charterholder and a member of the CFA Society of Chicago since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

WisdomTree profile picture
4.64K Followers
WisdomTree launched its first ETFs in June of 2006, and is currently the industry's fifth largest ETF provider. The WisdomTree Seeking Alpha profile will feature content by some of our leading analysts including: Luciano Siracusano: Luciano Siracusano is WisdomTree's Chief Investment Strategist and Head of Sales. He is the co-creator with CEO Jonathan Steinberg of WisdomTree's patented Indexing methodology and has led the firm's sales force since 2008. Luciano is a regular guest on CNBC and FOX Business, and speaks frequently on ETFs, indexing and global financial markets. A former equity analyst at ValueLine, Luciano began his career as a speechwriter for former New York Governor Mario Cuomo and HUD Secretary Henry Cisneros. He graduated from Columbia University with a B.A. in Political Science in 1987. Jeremy Schwartz: As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel's head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.” Christopher Gannatti: Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. Rick Harper: Rick Harper serves as the Head of Fixed Income and Currency for WisdomTree Asset Management, where he oversees fixed income and currency products developed through our collaborations with the BNY Mellon Corporation and Western Asset Management. Rick has over 19 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. Bradley Krom: Bradley Krom joined WisdomTree as a member of the Fixed Income and Currency team in December 2010. He is involved in creating and communicating WisdomTree’s thoughts on currency and fixed income markets, as well as analyzing existing and new fund strategies. Prior to joining WisdomTree, Bradley served as a senior trader on a proprietary trading desk at TransMarket Group. Tripp Zimmerman, Research Analyst Tripp Zimmerman began at WisdomTree as a Research Analyst in February 2013. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Prior to joining WisdomTree, Tripp worked for TD Ameritrade as a fixed income specialist. Tripp also worked for Wells Fargo Advisors, TIAA-CREF and Evergreen Investments in various investment related roles. Tripp graduated from The University of North Carolina at Chapel Hill with a dual degree in Economics and Philosophy. Tripp is a holder of the Chartered Financial Analyst designation. Jonathan Steinberg, CEO Prior to establishing WisdomTree, Jonathan founded, and served as Chairman and CEO of Individual Investor Group, Inc. From 1998 to 2004, he held the role of Editor-in-Chief of Individual Investor and Ticker magazines. Before his entrepreneurial accomplishments, Jonathan was an Analyst in the Mergers & Acquisitions division at Bear Stearns & Co. He attended The Wharton School at the University of Pennsylvania and is the author of Midas Investing, published by Random House in 1996. Zach Hascoe, Capital Markets Zach Hascoe began at WisdomTree in August 2010, and works directly with David Abner, Head of Capital Markets. The Capital Markets group is involved in all aspects of the WisdomTree ETFs including product development, helping to seed and bring new products to market, as well as trading strategies and best execution strategies for the client base. Zach works closely with the trading and liquidity community and does analytics on ETF baskets and the capital markets. He is a frequent contributor to the WisdomTree blog on topics related to the capital markets, liquidity, structure and best execution. In addition, he manages the hedge fund relationships for the firm. Zach received a B.A. from Bucknell University and was Captain of the Bucknell Tennis Team.

Recommended For You

Comments (3)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.