Japanese Yen Could Easily Strengthen Further, Which Isn’t All Bad For Stocks

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Japanese Yen Could Easily Strengthen Further, Which Isn’t All Bad For Stocks by Eric Bush, CFA – Gavekal Capital Blog

During 2015 the yen became undervalued compared to the dollar on a purchasing power parity basis to an extent that it had never reached over the past 30 years. On June 5th, based on our PPP cpi differential model, the yen was a remarkable 32% undervalued compared to the dollar. The recent strengthening has improved how undervalued the yen is compared to the dollar but at 22.39% undervalued, the yen has much more room to run. Also, the yen isn’t just undervalued against the dollar either. On a PPP basis, the yen is 7% undervalued against the euro and 13% undervalued against the Canadian dollar.

Japanese Yen vs U.S. Dollar

Japanese Yen vs U.S. Dollar

Japanese Yen vs U.S. Dollar

To most investors, the idea that the yen could gain by 20% against the dollar and still be considered slightly undervalued is the final nail in the coffin for Japanese equities. It is generally believed that a stronger yen is terrible for Japanese stocks and foreign investors have been acting on this common belief. However, developed market Asian counter-cyclicals, especially growth counter-cyclicals, have actually tended to outperform other developed market equities in a strengthening yen environment over the past 15 years.

Japanese Yen vs U.S. Dollar

Japanese Yen vs U.S. Dollar

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