The recent coordinated effort by U.S. and Japanese monetary authorities to prop up the sagging yen understandably rattled global markets. While critics claim that the positive effects of the US/Japan “salvation” effort were short-lived, Japanese equities aren’t worse for wear.
For example, the WisdomTree Japan Opportunities Fund (OPPJ) posted a modest gain over the past month. This gain is arguably all the more impressive when considering that the yen intervention unnerved some investors.
Yen Intervention and Japanese Equities
Indeed, some market participants view yen appreciation negatively because Japan is an export-driven economy. A weaker dollar reduces international earnings for Japanese companies when those dollars are converted into yen.
However, OPPJ has avenues for off-setting some of that risk. Perhaps surprisingly to some investors, part of that mitigation comes by way of its weight to tech stocks.
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“A key reason is that recent gains in Japanese equities have been led mainly by AI- and semiconductor-related sectors,” said Naoki Kamiyama, chief strategist at Amova Asset Management. “These sectors are primarily supported by strong volume growth rather than a weak yen.
Although a stronger dollar reduces the value of revenue earned overseas when translated into yen, sales driven by robust global demand are strong enough to offset exchange rate fluctuations. Therefore, the impact of yen appreciation on the earnings of high-growth AI- and semiconductor-related sectors is expected to be relatively modest.”
Potential Catalysts for Growth
While a somewhat esoteric concept, the unified front presented by the U.S. and Japan to support the yen could be a spark for Japanese equities. This would include those residing in OPPJ. At minimum, the two countries working together sends a clear message to global markets that yen support is a priority.
“From a longer-term perspective, the most important implication of the coordinated intervention is its announcement effect,” added Kamiyama. “By acting together, Japan and the US expressed a shared concern over the yen becoming too weak — a phenomenon that could be negative not only for Tokyo but for Washington as well.
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The presentation of a unified front creates a psychological barrier for speculative investors and may help reduce volatility in the broader markets.”
Another potential catalyst for OPPJ is interest rate normalization between the U.S. and Japan. This outlook is rooted in the notion that next moves by the Federal Reserve and the Bank of Japan will be in opposite directions.
“Even if additional rate hikes occur, the broader impact on equities is expected to be limited,” concluded Kamiyama. “Higher rates would be positive for banks, while a stronger yen could reduce energy costs and support domestic demand.
Meanwhile, AI- and semiconductor-related companies remain driven primarily by structural growth trends rather than modest changes in interest rates or exchange rates.”
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