Source says the economic dawn is finally breaking in the Land of the Rising Sun
A February 22nd report from multi-asset research firm Source highlights that the Swiss are beginning to take a closer look at investment in Japan given the current economic situation in both countries, and especially given the fact that Abenomics seems to be gradually breathing life into the Japanese economy.
According to Source analysts Paul Jackson and András Vig, “Swiss investors should still be looking overseas for their equity exposure, especially to Japan. The last time the yen was anywhere near as cheap for them, Swiss investors saw their investment in Japanese equities multiply 12x in 10 years (if hey hadn’t hedged their currency exposure).
Strong Q4 economic data for Japan
Jackson and Vig start out by noting that Japan’s fourth quarter GDP data is finally moving in the right direction, although it’s only a +0.6% qoq uptick, it’s likely the beginning of a positive trend. Moreover, January’s 17% year-over-year increase in exports and 9% decline in imports are strong evidence the weak yen is starting to have an impact. PMI data also suggests the Eurozone is enjoying a tailwind from a weaker currency as the composite PMI moved up to 53.5.
“Japan through Swiss eyes”
The Source analysts also point out that changes in competitiveness stem from both changes in foreign exchange rates and changes in relative price levels. Japan, where prices have been falling for much of the last 20 years, is now a much different than it was two decades ago, and has actually become highly competitive from a macroeconomic perspective. The recent weakness of the yen together with the price declines means Japan is the most competitive versus Switzerland in more than three decades.
Jackson and Vig argue the Japanese economy is at long last moving into its sweet spot. “Though currencies do overshoot, economic reality dictates they cannot stay at such extremes for long. Just as the Swiss economy will suffer from an overvalued currency, the Japanese economy will reap the rewards of being so competitive (note the above mentioned 17% yoy gain in exports in January).”
In the 10 years after the yen was last this weak against the CHF (beginning 12/79), Swiss stocks were up by almost 250%, while the Swiss franc value of Japanese equities appreciated nearly 12 times (with a 75% gain in the yen contributing). The key point here is the Swiss economy and stock market will be held back by the strength of the Swiss franc, while the Japanese economy will be aided by the weakness in the yen.
That brings Jackson and Vig to their main point: “Swiss investors really should be looking to make overseas investments to avoid both the weakness of the economy and the eventual fall from grace of the CHF. Japanese stocks would appear the obvious place to go and those who hedge the currency exposure may lessen their returns.”
Of note, Japanese equities have been in an uptrend for several months now, while the yen is basically unchanged. It’s possible Japan will see a situation where an export-led economic recovery benefits both the stock market but the currency.
The Source analysts argue it’s possible the next few years will be a return to the environment of the 1970s, 1980s and 1990s when Japanese equities and the yen went up at the same time.