Kelvin Tay, regional chief investment officer of UBS Global Wealth Management, told CNBC’s “Squawk Box Asia” program that entering the Japanese market at this time is like catching “a dropped knife.”
His remarks came as the Nikkei 225 and Topix continued their decline, falling more than 7% on the day and hovering near the bear market.
“The only reason the Japanese market has risen so strongly over the past two years is that the yen has been very, very weak. Once there’s a reversal, you have to exit correctly, and I think they’re all exiting as a result now,” Tai said.
The yen fell to a 38-year low of 161.99 against the dollar in June, but reversed course on the eve of the Bank of Japan’s policy meeting.
The yen strengthened sharply after the Bank of Japan raised its benchmark interest rate to around 0.25% last week and decided to cut its purchases of Japanese government bonds.
at present, JPY It last traded at 144.82, its lowest level against the dollar since January. A stronger yen has weighed on Japanese stocks, which are dominated by trading and export-oriented companies, undermining their competitiveness.
Bank of Japan Governor Kazuo Ueda sounded tough at the press conference after the central bank’s meeting on July 31, saying “if the economy and price trends are in line with our forecasts, we will continue to raise interest rates.” Reuters reports.
He also said policy rates were “quite a ways off” from reaching a neutral level that would neither cool nor overheat the economy.
Ueda also said Interest rates at 0.5% (something Japan has not seen since 2008) are not an obstacle and rates could be higher.
Yen Barometer
Tay said the yen could show whether the Japanese market will perform well. Stocks fell as the yen strengthened and “unfortunately, Japanese stocks are still under more pressure,” he said.
While Tai acknowledged that some of the market’s gains were due to the Tokyo Stock Exchange’s corporate restructuring efforts, “the main driver was the yen.”
One of the reasons why the yen is so important in the Japanese market is the so-called ” The closing of the “yen carry trade”.
When the yen is weak and Bank of Japan interest rates are zero or negative, investors borrow yen and invest the proceeds in higher-yielding assets.
Using the central bank’s benchmark interest rate as a guide, investors could borrow yen at 0% earlier this year and invest the money in the United States, earning 5.25% interest.
Now, as the Federal Reserve signals an interest rate cut and the Bank of Japan raises interest rates, the interest rate differential between the two central banks will narrow, making the “carry trade” less attractive, which may lay the foundation for the appreciation of the yen.
Tay expects the yen to trade at around 143 to the dollar, but could rise to 135 if Japanese life insurance companies and pension funds start sending more yen back to Japan.
“So, yes, it (the yen) may find a level, but at the moment, Japanese stocks are still not attractive enough for me to actually want to get in.”
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