Softer yen supports investment in Japan

January 10, 2017 / By  

Recent shifts in sentiment as well as divergent global monetary policy have led to a hasty depreciation of the Japanese yen over the past few months. Following the November 4 US election, the yen has slipped 13 percent from 101 to 116 against the US dollar. The reasons for the fall are well-documented and are generally based around higher inflation expectation in the US, further increases in the Fed policy rate and an overall improvement in sentiment.

The Japanese yen remains very much a risk currency – over the same timeframe post-US elections, the yen has also fallen by 6.5 percent against the Euro and 12 percent against the pound sterling. One of the reasons for this has been the interest rate differential between the various currencies. Higher inflation expectations tend to push the long end of the yield curve higher, in turn improving the relative return of a currency and driving capital flows.

Japan on the other hand has recently implemented a policy whereby they will target a 10-year bond yield rate of 0 percent. This buying pressure at the long end of the curve has offset much of the selling pressure and therefore leaving long-term interest rates relatively stable when compared to movements in other markets.

The weaker yen is likely to be music to the ears of the large manufacturing export base, as well as the Abe administration as they seek to achieve an inflation target of 2 percent. Recently we’ve also seen Japan’s service sector PMI reach an 11-month high (52.3) and the manufacturing PMI reach a one-year high of (52.4), highlighting the improving growth prospects of the economy.

In the short-term, the already burgeoning tourism market is likely to be supported by a weaker yen which tends to deliver benefits for both the hotel and retail sectors, providing subsequent real estate investment opportunities in these sectors.

What it means for investors

While the fundamentals are improving, the benefit to real estate investors in Japan also extends further with regard to the near-term stability of interest rates and improving hedging rates. Other markets are starting to see upward pressure on fixing costs; however given that the Bank of Japan has essentially fixed the long-term bond rate, we have seen little evidence of any base rate movement in Japan thus far. Furthermore, that interest rate differential is the main factor when pricing currency hedging rates.

Given the low interest rate structure, investors coming into Japan have always received a hedging benefit. However, the interest rate differential has widened and investors are now receiving the most favourable outright forward rate on five-year terms (relative to spot) seen since 2009.

chart1_10jan2017Source: Thomson Reuters

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