Over the last month, the Japanese yen has seen a sharp devaluation against the U.S. dollar. As we continue through the first week of December, Tokyo's Nikkei 225 stock index has also taken a hit. Yes, this is largely due to the dollar being on a tear during the post-election "Trump Rally." However, the eventual end of this rally in 2017 could be a key turning point for Japanese markets.
Trading the Yen
We've seen the yen devalued recently, perhaps quite on purpose as part of the prime minister's eponymous economic plan known as "Abenomics." In early November, the JPY / USD exchange rate fell as low as ¥103.1 per dollar at the height of the election jitters in the U.S. The initial surprise of Trump's victory caught markets around the world off guard, including driving safe haven bets on the yen.
In the time since, the dollar has surged 4.6% against a basket of its peers and equity markets have bounced back sharply. As a result, the yen is now trading around ¥114.7 per dollar, or 11.25% weaker compared to a month ago. At one point this spring, the gold price in JPY was ¥20,000—+16%, about $200 at the time—higher. It has stayed relatively steady in terms of yen per ounce of gold, however. This speaks to how both tend to advance during periods of market uncertainty.
Such volatility has characterized Japanese stocks and the country's currency over the course of 2016. For the most part, the Nikkei 225 index has tracked inversely to the performance of the yen—meaning stocks rise when the value of the currency drops. Japan's benchmark stock index is down to 18,275, losing more than 2% since December started. Both the index and the yen lost about 0.8% on Monday morning.
Looking Ahead to 2017
2017 could hold some trend-breaking patterns in store for those interested in Japanese markets.
For starters, the inverse relationship or correlation between stocks listed in Tokyo and the value of the yen could be broken next year. A number of experts in finance have suggested that the yen could rally below ¥100 to the dollar over the course of the next 12 months. Whereas investors usually hold yen as a safe haven (along with Swiss francs and U.S. dollars), next year they could be looking at the yen as a higher-yield alternative to more stagnant Western markets. This coincides with projections that the Nikkei will follow up a dismal 2016 with a recovery to all-time highs in 2017.
The case for an improved outlook for Japanese assets in 2017 is also based on expectations that the country's finance ministry will succeed in securing the "Third Arrow" of Abenomics: fiscal stimulus. A round of increased government spending would in theory give inflation a modest boost while providing a lift to stock valuations. Even if the markets end up merely "buying the rumor" of expansionary fiscal policy from Abe's government, this optimism alone could trigger higher returns from firms listed on the Nikkei 225.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.