What is the impact of the yen carry trade on earnings? Jefferies weighs in

Published 2024-08-20, 10:12 p/m
© Reuters.
USD/JPY
-

Investing.com-- The Japanese yen firmed sharply over the past month as the Bank of Japan began raising interest rates, sparking a rapid unwinding in the yen carry trade that had spurred strong capital flows into broader risk-driven markets. 

Analysts at Jefferies said that a regime change in the yen was imminent, and that growing long positions on the yen were likely to impact corporate earnings in Japan. 

Jefferies said historical data showed the yen strengthening by an average of 25% during an unwinding carry trade, while setting an optimal level for USDJPY at 140 yen. 

But further economic weakness in the U.S. economy could elicit more rate cuts and see USDJPY fall to as low as 120 yen, Jefferies said. 

The brokerage said that every 10% appreciation in the yen leads to a 5% cut in annual earnings in the next one-two years. 

But during “global crisis periods, the impact is amplified to 20% earnings cuts due to Japan’s high operating leverage.” 

Export-oriented sectors are likely to be the most impacted by this trend, while sectors with domestic exposure are likely to gain. 

Japan’s Nikkei 225 and TOPIX indexes tumbled in early-August, with Jefferies stating that markets had currently priced in a 5% earnings downgrade, and a USDJPY level of 146. 

Jefferies says overweight Japan on persistent yen strength 

But despite the potential near-term impact of yen appreciation, Jefferies said that investors should overweight Japan if the cycle of yen strength remained persistent. 

Historical data showed that even though Japanese markets fell on a local currency basis during periods of yen strength, they appreciated substantially on a dollar basis.

The brokerage noted that low-risk and quality stocks were likely to benefit from a stronger yen, particularly sectors with exposure to domestic revenues.

Jefferies said real estate stocks, food and beverage, energy, consumer services, media and discretionary stocks were likely to benefit from a stronger yen. 



Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.