The reversal of the Yen could trigger a market rally

Market Development: In early April, the Japanese market declined on the back of concerns over the US monetary tightening; and the slowdown of the Chinese economy from prolonged COVID-19 lockdowns.

Fund Commentary
16 May 2022

Market Development: In early April, the Japanese market declined on the back of concerns over the US monetary tightening; and the slowdown of the Chinese economy from prolonged COVID-19 lockdowns.

In mid-April, the US 10Yr Treasury continued to rise and hit 2.977 on the 20th, the highest since November 2018, which brought down equity markets in both the US and Japan, most notably for growth stocks. That said, the depreciating Yen against the US Dollar supported the Japanese market with exporters gaining, in particular.

In late April, the market declined from increasing concerns over monetary tightening in the US, but the Japanese market narrowed its losses at the end of the month, prior to Golden Week, when the Yen depreciated to more than 130 against the US Dollar.

This weakening Yen came on the back of the BoJ’s decision on the 28th that it would conduct a fixed-rate purchase operation in order to maintain a low-interest rate in Japan, amid the increasing US rate.

In April, the TOPIX closed the month at 1,899.6 (down 2.4% MoM) and the Nikkei 225 at 26,847.9 (down 3.5% MoM). 24 out of 33 sectors declined. Defensive stocks and companies involved with commodities were the better performers.

The top five performers were Fishery Agriculture & Forestry, Mining, Utilities, Pharmaceuticals and Communication. The bottom five performers were Marine Transportation, Services, Electricals, Securities and Non-Ferrous metals.

The 10Yr JGB yield began at 0.22, and at one point surpassed 0.25 when the US 10Yr Treasury approached 3.0, but then closed the month at 0.23 following the BoJ’s decision to maintain the fixed-rate purchase. The JPY against the US Dollar opened at 121.7 and continued to depreciate as the US interest rate continued to surge and the rate gap between the US and Japan widened.

At one point, the JPY depreciated beyond 130 when the BoJ decided to maintain a flat JGB, ending the month at 129.7. The Crude oil price opened at 100.28 and closed at 104.69.


The Japanese economy looks solid, despite the Ukraine crisis continuing and the prolonged lockdown in Shanghai. Industrial production in March rose 0.3% MoM, marking the second consecutive monthly rise, following +2.0% in February.

The government estimates that industrial production will increase 5.8% MoM in April and decline 0.8% MoM in May. Retail sales in March rose by 2.0% MoM, the first increase in four months. Most likely, the recovery is reflective of the lifting of the emergency infection control measures (on 21st March) due to a decline in new infections.

According to the Economy Watchers Survey of Business announced on 12th May, the overall current conditions DI for April rose 2.6 points, MoM, to 50.4, continuing the sharp recovery from March (+10.1 points). The outlook DI also improved slightly to 50.3 from 50.1 the previous month.

On 4th May, the US FRB raised its policy rate by 0.5% and unveiled plans to start shrinking its USD 9 trillion balance sheet from June 2022. It was also suggested that the Fed would implement multiple half-point rate increases this year.

On the other hand, following its policy meeting held on 28th April, the Bank of Japan announced that it would keep overnight call rates at -0.1% and not change any other monetary policy parameters.

In the Outlook Report, the core CPI inflation forecast for FY2022 rose sharply to 1.9% from 1.1% in January, mainly due to rising energy prices. The real GDP growth forecast for FY2022 was lowered to 2.9% from the 3.8% previously estimated.

Core CPI inflation is estimated to slow down to 1.1% for FY2023 and it is argued that high inflation is just transitory as it is being driven by the cost-push factor, rather than the demand-pull factor. We believe the report may underestimate the ripple effect brought on by higher prices of energy and other commodities used in many other goods.

The Japanese government has requested large companies to increase salaries by more than 3% pa and the recent weakness of the Yen against the US Dollar should have a big impact on the CPI. There have recently been some arguments among economists and industrialists that weakening the Yen from this level (130 JPY vs. USD) is not a positive for the Japanese economy.

Mr Kuroda, the governor of the BoJ, continues to believe that a weak Yen is better for the economy. He appears stubborn with his words, policy rates may not change until he retires, expected to be in April 2023. That said, we believe that long rates should be creeping up in line with the inflation hike.

The BoJ may utilise other monetary tools to prevent further Yen’s weakness. We believe that Japanese manufacturers are competitive enough, even at the 110-120 Yen level. It implies that any clear signs of a Yen reversal should be a trigger for the Japanese stock market to jump up.

Portfolio Development

The net asset value per unit for the Nippon Growth (UCITS) Fund on a Japanese Yen basis as of 28th April 2022 went down 2.5% compared with that of 31st March, whilst the TOPIX TR Index declined 2.4% during the same period. The Fund added no new names to the portfolio and no stocks were sold out.

The Fund continues to be overweight in economically sensitive sectors with cheap valuations such as Trading Companies, Marine Transportation, Iron & Steel and Banking, while defensive sectors such as Foods, Pharmaceuticals, Retail and Utilities continue to be avoided. The Fund takes a very cautious stance on IT related sectors.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
+44 1481 742380


The views and statements contained herein are those of Evarich Asset Management in their capacity as Investment Advisers to the Fund as of 13/05/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.