According to Jesper Koll, director of financial services company Monex Group, the Japanese yen’s worst is still to come. In fact, he predicts that in the near future, it could fall even more.
“I think the parabolic overshoot is still on track, so I expect we’re going to see 150, 160 at some point over the next couple of months,” Koll said on Wednesday’s “Street Signs Asia” segment of CNBC.
On Wednesday, the Japanese yen plunged to a 24-year low versus the US dollar, reaching 144.35, its lowest level since August 1998.
The exchange rate early on Thursday was at 144 when compared to the dollar, but it has since marginally declined.
Why is the Japanese yen so weak?
Because it is “based on real fundamentals,” Koll argued that the devaluation of the currency is one of the “rigorous” and “easiest” actions to explain.
He went on to say that it is the most “textbook-driven currency move I’ve seen in 30 years.”
The widening interest rate gap between the United States and Japan and Japan’s trade and current account deficit, according to Koll, will both weaken the yen even more.
The Bank of Japan (BoJ) has been adopting a dovish posture on monetary policy following several years of deflation, in contrast to the U.S. Federal Reserve, which has been raising interest rates more aggressively to contain inflation.
The yen would lose value due to inflation since it would have less purchasing power.
“Inflation is likely to breach 3% before the end of this year, above the central bank’s 2% target,” Darren Tay, a financial analyst at Capital Economics Japan, said.
At 3%, inflation is considered to be mild compared to the United States, where it was 8.5% in July.
Tay stated on CNBC’s “Squawk Box Asia” on Thursday that the BoJ “remains very steadfast in its stance that it is going to maintain its ultra easy monetary policy in order to spur inflation and to support growth in Japan.”
The possibility of the central bank hiking rates “is close to nil,” according to Koll, who concurred with that estimate.
He asserted that the BoJ has “no smoking gun” for raising interest rates and is “committed to a free market in the currency markets.”
When questioned about the future for inflation in Japan, Koll responded that he would concur with the BoJ’s projection that consumer price inflation could “go back down to below 2%” in 2019.
In late August, the central bank declared that 2% inflation would not be sufficient. Instead, it went on to say that the “end goal” was for “accommodative financial conditions to facilitate higher corporate profits and improved labor market conditions, and thereby generate a virtuous cycle in which wages and prices see sustained increases”; loosening monetary policy would help it accomplish that goal.
Industries that will gain
A declining yen, however, is not always a bad thing; it might even make Japanese businesses more competitive. And in part because more businesses are looking to increase their imports from Japan, global supply chains are expected to change in Japan’s favor.
Companies that produce machinery
“If you cannot buy from China anymore, you’re gonna buy from Japan,” Koll advised investors to pay attention to Japanese machinery firms that would profit from both the weakening of the yen and modifications to the world supply chain.
A declining yen will “huge beneficiary” Keyence, a manufacturer of factory automation equipment, according to him.
Investors should also keep an eye out for Daikin, a manufacturer of air conditioners, he suggested.
“It’s getting hotter everywhere in the world … More and more households are going to equip themselves with air-conditioners and that’s where Daikin is really in a top pole position.”
According to Ryota Tanozaki, CEO of hotel chain Tabist, the depreciation of the yen is also likely to draw more tourists to Japan who want to take advantage of their increased purchasing power.
Tanozaki noted that he is optimistic about the declining yen and noted that inbound travelers will have much greater spending power as a result of the declining yen.
He claimed that Japan has a “variety of unique assets,” including its cuisine, transportation system, and traditions, that may entice tourists from abroad at a lower cost.
Despite a sharp decline in tourism spending over the past two years, Koll is hopeful that Japan would resume granting select travelers from certain nations visa-free entrance, as Taiwan has done.
On Wednesday, the Japanese government declared that it would further reduce the Covid-19 travel restrictions and boost the number of daily international visitors arriving.
Tanozaki stated that even though an increase in tourist arrivals will result in increased consumer spending in Japan, higher energy prices are still a cause for concern.
According to Koll, companies in the utility and food and beverage sectors will suffer as a result of the weakening yen because these are the sectors that depend most heavily on imports.
“I’m a little bit concerned about higher [prices] in oil and energy,” said Tanozaki. Geopolitical unrest and the depreciation of the yen will be “problematic” for firms in the tourism industry since they will have to pay more for utilities due to the increase in visitors.