The yen’s recent rebound has led global investors to reconsider their currency hedging strategies, reflecting a shift in expectations for the Japanese currency. With forecasts suggesting further yen appreciation, major financial institutions such as JPMorgan Chase & Co., UBS Group AG, and BNP Paribas Asset Management are advising investors to unwind currency hedges on Japanese equities to capitalize on potential gains in dollar terms.
Wei Li, a multi-asset quant solutions portfolio manager at BNP Paribas Asset Management, commented, “Currently, the recommendation is to invest in Japanese stocks without hedging currency exposure to benefit from higher returns in dollar terms due to potential yen appreciation.”
This change in strategy comes in the wake of the Bank of Japan’s decision to raise interest rates in July. While the stronger yen signals improved economic conditions in Japan, it also makes Japanese stocks more expensive for foreign investors and negatively impacts earnings for exporters.
UBS strategist Nozomi Moriya advocates for unhedged investments in Japan, following an adjustment in the firm’s yen forecast to 145 against the dollar, up from 160. Despite this, UBS has downgraded Japanese stocks to an underweight position in local-currency terms, citing concerns about the impact of a stronger yen on earnings forecasts.
In dollar terms, the Topix index recently reached a three-year high before retreating due to concerns about slowing global economic growth. The Topix has risen 7.1% year-to-date, outperforming the MSCI AC Asia Pacific Excluding Japan Index, which gained 5.4%. The Topix also surpassed the Hang Seng Index and South Korea’s Kospi.
Historically, many long-only investors, who bet on rising share prices without hedging against declines, did not hedge currency risk on foreign investments. However, recent yen weakness led many to hedge against currency fluctuations. This strategy’s popularity was evident in the significant growth of the New York-listed WisdomTree Japan Hedged Equity ETF in 2023.
However, the WisdomTree ETF has experienced an outflow of $897 million since August, as the yen strengthened and hit a seven-month high following the Bank of Japan’s hawkish policy stance. In contrast, the JPMorgan BetaBuilders Japan ETF, which does not hedge the yen, saw an inflow of $687 million during the same period.
Not all analysts view yen fluctuations as the primary factor influencing earnings. Masashi Akutsu, chief Japan equity strategist at Bank of America Securities, notes that Japanese earnings growth is increasingly driven by companies’ ability to raise prices in an inflationary environment rather than by yen depreciation.
Nevertheless, some strategists remain cautious about the potential for a rapidly strengthening yen to affect corporate earnings negatively. Saxo Markets strategist Charu Chanana advises a selective approach to Japanese equities, focusing on long-term themes such as corporate governance reforms and geopolitical factors. “The current environment presents a short-term risk-reward scenario tilted toward a stronger yen and weaker Japanese equities,” Chanana said.
