The case for currency-hedged Japanese stocks

We see global reflation and a weak yen propelling Japanese stocks higher on a currency-hedged basis. Richard explains, with the help of this week's chart.

We see a strong case for Japanese stocks on a currency-hedged basis, as this week’s chart helps explain. We believe they should disproportionately benefit from global reflation, as well as a potential pickup in Japanese growth ahead. A weak yen is a positive.


A falling yen helps the Japanese equity market in two ways. First, it boosts the earnings of Japanese exporters in local currency terms. This impact can be seen in the chart above, with forward earnings in Japan closely tracking the dollar/yen rate in recent years. Second, it makes Japanese assets cheaper for foreign investors, attracting capital inflows into Japan.

More than just yen weakness

We do see the yen’s slide slowing versus the U.S. dollar. Yet the currency is likely to remain weak as zero-anchored Japanese 10-year bond yields encourage local investors to buy higher-yielding foreign bonds. Beyond a weak yen, there are tentative signs local inflation may be picking up, with the biggest month-on-month spike in headline inflation seen in 25 years in October. Our BlackRock Macro GPS economic indicator also implies upside global and Japanese growth surprises could be ahead.

As a result, Japanese earnings estimates are rising. The three-month change in 12-month forward earnings estimates is near a two-year high. Japan’s relatively low corporate profit margins mean a given increase in revenues can have an outsized impact on earnings. A one percentage point increase in real global gross domestic product (GDP) growth has historically delivered a 21% boost to Japanese earnings, our analysis of the past 35 years shows, versus just 5% in the U.S. Japan’s political stability and creeping but underappreciated reform momentum also are positives, as are Bank of Japan (BoJ) equity purchases and rising corporate share buybacks and dividend payouts.

But there are risks, including a yen rebound, a growth slowdown in China, an unlikely change in BoJ policy before mid-year and longer-term worries such as a soaring debt load. For now, we see opportunities in Japanese exporters. Read more market insights in our Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.