Weakening yen could buoy Japanese equities

The Japanese yen has fallen more than 7 per cent against the US dollar since the election of Donald Trump on 8 November.

But according to BetaShares chief economist David Bassanese, that could be good news for Japanese exporters – as well as the Nikkei-225 index as a whole.

“History shows that in those periods when Japanese equities tend to outperform it is usually when the yen is weak,” Mr Bassanese said.

“Should the yen continue to weaken in 2017, therefore, it suggests Japanese equities may do relatively well – particularly on a currency-hedged basis.”

Japanese equities performed particularly well when the yen was weakening between mid-2005 an early 2006, and on a “more sustained basis” from late-2012 to mid-2015, Mr Bassanese said.

“This inverse correlation between the yen and relative equity performance appears to reflect the boost to international competitiveness that a weaker yen provides to Japanese exporters,” he said.

“To the extent the yen continues to weaken over 2017, therefore, it suggests potential for continued (currency-hedged) Japanese equity outperformance.”

On a valuations basis, the Nikkei’s price to forward earnings ratio (using Bloomberg’s estimates) is 16, compared with an average of 16.7 since the start of 2003.

Other measures, such as price-to-book value, suggest even greater relative value, Mr Bassanese said.

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