Yen: Opportunities ahead for investors

This article is an extract from the latest edition of the OFX Currency Outlook. To learn more about the yen and other major currencies and how your global business can prepare for the months ahead, download the full edition here.

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Will the Rugby World Cup have an impact on the yen in the coming months?

The Rugby World Cup has kicked off in Japan, with the tournament taking place between September 20 and November 2, which is set to boost the Japanese economy1 by a whopping Y437 billion.

The World Cup is expected to attract an additional 400,000 overseas visitors, and 1.8m fans in total to the 12 cities across the country where the games are being played. The boost to the country’s GDP is expected to reach Y216.6 billion with additional tax revenues of Y21.6 billion. It will also create 25,000 jobs according to an impact assessment released by the Japan organising committee in March 2018.

Hamish Muress, OFX senior currency strategist said: “The difficulty for the Bank of Japan for years has been weak inflation – it stalled again in August to 0.6% – and they have had to cut rates to below 0% and increase quantitative easing (QE). Ideally the RWC could help spending and drive inflation.

“The Japanese yen has benefited from the recent US-China trade war and this will continue to be the main driving force for the currency given its safe-haven status. Investors will flock to the yen instead of riskier assets.”

Yen

Yen: Investment opportunities ahead

The economic boost presented by the tournament sits alongside ongoing appeal for Japanese markets, which are currently seen by investors as undervalued, particularly in the Japanese smaller companies sector.

Taeko Setaishi, lead adviser of Atlantis Japan Growth Fund2, said: “Japan’s economy is undergoing significant structural change, which in turn, is creating numerous attractive investment opportunities in the healthcare, technology and the services sectors. In services, we believe one is spoiled for choice.”

Matthew Brett, manager of Baillie Gifford Japan Trust3, said the two major areas currently appealing to his trust are internet and factory automation companies. These comprise approximately 40% of the portfolio, he said. Companies like Softbank, which has a large investment in Alibaba, ARM and other exciting venture companies.

Consumption Tax creates recession fears

However, these opportunities are offset somewhat by concerns over the long-awaited rise in Consumption Tax to 10% which is still expected to happen on October 1. Despite the anticipated benefits of the Rugby World Cup, there are still concerns this action could lead to a recession4.

The Consumption Tax has previously been applied to all goods uniformly, but there will be some exemptions to the increase according to the Nikkei Asian Review5. For example, takeout food will remain at 8% while restaurant diners will pay the full 10%. But whether there is a downturn on the back of the tax rise will not be known for sometime.

Watch to watch

For businesses dealing with Japanese companies, there is currently a little respite from the strengthening of the ‘safe haven’ yen on the back of the US-China trade war. The US dollar was worth Y105.306 on August 12, but had weakened to Y108.165 at the time of writing as the hostilities between Washington and Beijing seem to ease ahead of discussions in October.

It makes now a good time to consider what your exposure to the yen will be in the months ahead, or if you need to buy goods or services from Japan. OFX currency experts can help you understand the different tools you have at your disposal to help get the right deal at the right time.

1https://www.japantimes.co.jp/news/2019/08/19/business/japan-expects-reap-%C2%A5437-billion-economic-benefits-hosting-rugby-world-cup/#.XXuCnihKg2w

2https://www.theaic.co.uk/aic/news/press-releases/japan-an-undervalued-opportunity

3https://www.theaic.co.uk/aic/news/press-releases/japan-an-undervalued-opportunity

4https://asia.nikkei.com/Spotlight/Asia-Insight/Japan-s-sales-tax-Looming-increase-sparks-recession-fears

5https://asia.nikkei.com/Spotlight/Asia-Insight/Japan-s-sales-tax-Looming-increase-sparks-recession-fears

IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.

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