Investing.com — The Japanese yen rose sharply last month as the Bank of Japan began raising interest rates, prompting a rapid unwinding of the yen carry trade that had fueled strong capital flows into broader, risk-driven markets.
Analysts at Jefferies said a regime change for the yen was imminent, and growing long positions in the yen were likely to impact corporate profits in Japan.
Jefferies said historical data shows the yen has risen an average of 25% during a declining carry trade, while an optimal level was set at 140 yen.
But further economic weakness in the US economy could lead to more rate cuts and push the USDJPY down to a low of 120 yen, Jefferies said.
The broker said that every 10% appreciation of the yen will lead to a 5% reduction in annual revenues over the next one to two years.
But during “global crisis periods, the impact is amplified to 20% profit declines due to Japan’s high operating leverage.”
Export-oriented sectors are likely to be most affected by this trend, while sectors with domestic exposure are likely to benefit.
Japan’s indexes and indexes tumbled in early August, with Jefferies stating that markets were currently pricing in a 5% earnings cut and a USDJPY level of 146.
Jefferies says it is overweight Japan due to the continued strength of the yen
But despite the potential short-term impact of the yen’s appreciation, Jefferies said investors should consider Japan if the cycle of yen strength continues.
Historical data showed that while Japanese markets fell on a local currency basis during periods when the yen was strong, they appreciated significantly on a dollar basis.
The brokerage noted that quality, low-risk stocks were likely to benefit from a stronger yen, especially sectors with exposure to domestic revenues.
Jefferies said real estate, food and beverage, energy, consumer services, media and sustainable stocks were likely to benefit from a stronger yen.
