If Japan’s central bank deflates the yen in coming months, investors with exposure may lose money.
However, the currency’s devaluation could also create opportunities, says Luc de la Durantaye, first vice-president of global asset allocation for CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.
Japan has gotten the short end of the stick in the currency war, with the yen appreciating considerably since the financial crisis.
It’s also had to import most of its energy requirements since the tsunami, which has created a large trade deficit. The country is facing possible deflation as a result.
“Pressure in Japan is mounting,” says de la Durantaye. “There’s a growing consensus among politicians and corporations that the only way out is for the Bank of Japan to be more aggressive in loosening its monetary policy to depreciate the yen.”
He adds, “This is important for investors with exposure to Japanese equity markets because they would lose money due to the weaker currency.”
And since it’s 30% overvalued, there’s ample room for it to depreciate over time. Though this may not occur in the next three-to-six months, it’s possible over a one-to-two year period.
The upshot? The weakening of the yen would be a good for Japan’s economic recovery, says de la Durantaye, and it would help boost equity markets.
“There might be opportunities in Japanese equity markets, as long as you hedge your currency position,” he adds.