Yen’s Too Weak and Benefits Are Waning, Japan Bourse Chief Says

The yen is too weak and its benefits for Japanese stocks are diminishing while negative economic side effects are starting to show, according to the chief of the nation’s stock exchanges.

(Bloomberg) — The yen is too weak and its benefits for Japanese stocks are diminishing while negative economic side effects are starting to show, according to the chief of the nation’s stock exchanges.

While it’s natural for the currency to drop given a widening interest rate gap between Japan and the rest of the world, the depreciation is pushing up the nation’s import bill, notably for key energy items such as oil, said Hiromi Yamaji, chief executive officer of Japan Exchange Group Inc. At the same time, it’s no longer such a big tailwind for manufacturers like automakers, which have factories all around the world, he said.

Rather than just the cheap yen, Yamaji points to the size of the Japan’s economy and markets, the liquidity of its securities and the stable political and regulatory environment as other key reasons for the nation’s shares touching a three-decade high this year. In his view, Japan is also benefiting from a reallocation of global funds from China amid geopolitical stresses ranging from the future of Taiwan to technology transfer in the semiconductor industry.

“Japan comes to the top of the candidate country list,” for investors considering where to put their money, Yamaji, 68, said in an interview.

He’s also confident that the nation can cope with interest rates rising from around zero. The Bank of Japan will eventually raise rates and the stock market should be able to absorb the impact because the move will signal that policymakers see stable inflation in the economy, Yamaji said.

The yen has slipped below the levels where Japanese officials intervened last September to rein in the weakness in the currency, their first yen-buying intervention in 24 years. Traders are closely watching whether Japanese authorities signal that they’re ready to intervene again, or if the BOJ moves to hasten the pace of its policy tightening.

“This level of exchange rate is a bit too weak for the Japanese yen,” Yamaji said.

The Tokyo Stock Exchange, meanwhile, requested earlier this year that companies trading below book value come up with capital improvement plans to raise their market value. Pushing for changes like those is key to ensuring that Japan’s share rally stays sustainable this year, foreign investors including fund managers at hedge fund Man Group and strategists at Goldman Sachs Group Inc. have said. 

Still, some critics say the progress has been falling short of market expectations. Some 46% of TSE-listed firms still trade with a price-to-book ratio of less than one, according to data compiled by Bloomberg. Analysts at Mizuho Securities Co. also wrote in July that the reform may disappoint foreign investors as few companies mentioned improvement measures in their recent corporate governance reports. 

“We have further room for improvement,” said Yamaji, who started his current job in April after a promotion from the Tokyo exchange CEO position. Before that, he was an executive at Nomura Holdings Inc. 

The dynamics of the market will change drastically if Japanese retail investors buy more stocks next year, when the government plans to expand its tax-exempt Nippon individual savings account program, or NISA, Yamaji said.

Accelerating inflation in Japan is boosting demand for shares among households, who need to contend with rising electricity and food costs. Companies that sat on cash during Japan’s lost decades are also feeling the urge to spend more before prices rise even more, he said. 

Evidence of increased interest in stock investing among individuals can be seen in Yamaji’s own company. The number of shareholders in JPX doubled in the fiscal year ended March to about 135,000, without the firm offering new incentives for investors, the CEO said.

“We didn’t change our dividend policy, we didn’t change share buyback policy — I got so surprised,” Yamaji said. “Inflationary pressure this time looks like a real one.”

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