Currency markets, equities

In 2022, a weakening yen (JPY) and more competitive exports helped support Japanese equities. This year, however, we see the yen strengthening against the US dollar (USD), with the USDJPY trading around 120 by the end of 2023, from today’s 130. The US Federal Reserve is slowing the pace of rate hikes while the BoJ tightens policy. The yen is also benefiting from the economy’s improving terms of trade. It increasingly looks like an attractive alternative haven currency to the dollar.

A change of dynamic for the yen will have implications across markets, with a tailwind for Japanese equities becoming a headwind in 2023. In light of this, we favour sections of the market more focussed on domestic demand than exports. We shifted our Japanese equity allocation from large cap to small and mid-cap stocks in November 2022. The latter stand to benefit more from Japan’s improving growth outlook, as well as from increased foreign tourism and a stronger yen that would reduce the cost of imports. Specifically, we favour regional banks, real estate, transport, leisure, consumer discretionary stocks, and internet service and content providers.

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