Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
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Speaker: Hello from Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, head of Asian equity strategy at HBC Global Research.
Speaker: On today's show, we're asking, could a relatively minor move in the currency markets actually signal the start of a new era for the Japanese yen?
Speaker: My studio guest is global forex strategist Lenny Jin.
Speaker: Let's get the conversation started right here, Under the Banyan Tree.
Speaker: So let's set the scene for today's discussion.
Speaker: There's been an interesting move for the Japanese Yen, which has gained about 2% against the US dollar this past week.
Speaker: Now that might not sound like a lot, but this could have some big consequences, especially given that over the past three years the Yen has fallen by more than 25% against the dollar.
Speaker: Could this signal the early stages of a long-awaited recovery?
Speaker: And if so, what are the knock-on effects for currencies and equities in the region?
Speaker: Joining me to discuss all that and much more is global forex strategist Lenny Jim.
Speaker: Lenny, welcome to the podcast.
Speaker: Thank you very much, Harold, for having me.
Speaker: So something is changing in markets, particularly with regards to the yen.
Speaker: The yen has moved a bit this week.
Speaker: So tell me first, what's happened?
Speaker: Can you put this a little bit in context?
Speaker: Sure Harold.
Speaker: So Yen has been weakening throughout the past year and seems that tide is turning.
Speaker: It might be the start of a new era.
Speaker: What it boils down to is three things in my view.
Speaker: One is US yields has been moving lower in the past week that has been benefiting the Yen.
Speaker: Second is there has been a bit of renewed focus on Bank of Japan.
Speaker: And there has been some hawkish comments from the board members that seem to be in favor of the yen.
Speaker: There has been some positive initial results from the Shonto, which is a wage negotiation in Japan.
Speaker: And some people have been selling yen for the dollar.
Speaker: But since the tide seems to be changing, they're reducing their trades.
Speaker: Okay, so there's a lot going on here.
Speaker: So let's unpack this a little bit.
Speaker: So you're saying we've seen a weaker yen over the last years.
Speaker: Everybody basically didn't want to have the yen because the interest rates are close to zero and they wanted to go to the US.
Speaker: And now you're saying the US is talking about lowering interest rates and bond yields have fallen.
Speaker: And in Japan, they're talking about raising interest rates.
Speaker: And therefore, we now see money flowing back into the yen.
Speaker: Yes, correct.
Speaker: So it's all about the story of converging interest rates between the US and Japan.
Speaker: Okay, let's take a look at that.
Speaker: So why is the whole world talking about lowering interest rates, but Japan is talking about raising interest rates?
Speaker: Yes, so it's a very specific phenomenon in Japan because they have been stuck in this deflation mindset or deflation economy for decades.
Speaker: And now we're finally seeing some inflation broadening out even in Japan from goods inflation initially now to the services.
Speaker: And key to the Bank of Japan's outlook is the wage negotiation, because what they really want is a virtuous cycle, meaning that higher demand leads to higher wages, which encourage people to spend more, which leads to even further inflation.
Speaker: So that's the opposite of what they had over the last 20 years or something like that.
Speaker: Exactly.
Speaker: And also I guess the weaker yen means that anything that you buy from outside of Japan is also higher in yen cost, right?
Speaker: Exactly.
Speaker: Import inflation as they call it, right?
Speaker: Exactly.
Speaker: So that is encouraging the Bank of Japan to rethink their monetary policy framework because they have been implementing this policy called negative interest rate policy, which is
Speaker: opposite from most of the central banks in the world, and now they're considering moving out of that regime.
Speaker: When is this going to happen?
Speaker: HSBC economics team thinks this will happen in April.
Speaker: Okay, quite soon.
Speaker: Yes.
Speaker: So you think that convergence, as you call it, they're getting closer of these interest rates, will continue throughout 2024?
Speaker: This is actually the key debate in markets right now.
Speaker: People are asking, yes, we believe there will be an initial raise in interest rates out of the negative interest rate territory, but whether there will be follow up?
Speaker: I think whether there will be follow up would determine where the yen will actually go from the yen side.
Speaker: Of course, when we think about the currency pair dollar against yen, there's always an impact from dollar as well.
Speaker: So the Federal Reserve and their interest rate decisions will also greatly impact this currency pair.
Speaker: So if the U.S. is thinking about lowering interest rates into the rest of the year, but the Japanese are raising interest rates maybe only once, these interest rates are getting closer together.
Speaker: And that means that the yen remains relatively attractive.
Speaker: So you would therefore expect the yen to continue to be rather strong throughout this year, I presume.
Speaker: Yes, that's correct.
Speaker: So even though we expect the Bank of Japan to only potentially raise interest rate once, we think the Federal Reserve may actually continue to to actually lower their interest rate several times throughout 2024.
Speaker: So that leads to some yield compression or basically the rates in Japan, rates to US converging towards each other.
Speaker: So that's going to reverse people's mindset of constantly being negative on the yen throughout the past couple of years.
Speaker: We think there are two other considerations that may actually support our view of yen strengthening over the year of 2024.
Speaker: The first one is a so-called J-curve effect.
Speaker: In simple words, a cheap yen will lead to a lower appetite for imports from domestic consumers and will actually lead to a bit of pickup in exports from foreign consumers.
Speaker: For the rest of the world, Japanese products are good.
Speaker: Everybody goes on a holiday to Japan, right?
Speaker: A cheaper.
Speaker: Because it's cheap there, yeah.
Speaker: Yes.
Speaker: So we think this will lead to a bit of money flowing into Japan rather than money constantly flowing out.
Speaker: The second reason is yen is historically considered one of the safe haven currencies.
Speaker: So that means if we have an economic downturn, our world goes into some of extreme events, then yen tends to strengthen.
Speaker: We have a lot of potential risk events throughout 2024, including U.S. elections.
Speaker: And the yen is like the U.S. dollar or the Swiss franc is also a bit like that, right?
Speaker: Exactly.
Speaker: Exactly, exactly.
Speaker: So we've talked about monetary policy.
Speaker: We've talked about some of the other factors that also support strengthening in the yen throughout this year.
Speaker: But what about domestic investors?
Speaker: They're really big as well, right?
Speaker: What are they doing?
Speaker: Yes, exactly.
Speaker: So domestic investors tend to invest in investment trusts.
Speaker: And we have found that investment trusts have started to invest a bit more in foreign equities and foreign bonds.
Speaker: So that leads to a bit of outflows.
Speaker: And we think the main reason behind that is recent change in rules for this NISA account.
Speaker: Yeah, those NISA accounts, those are the Nippon investment saving accounts that gives all sorts of tax benefits for people that live in Japan to invest in global equities or Japanese equities and bonds and these sort of things, right?
Speaker: Exactly, Harold.
Speaker: So basically, the rule has lifted the investment threshold for local or domestic investors.
Speaker: That means they have more incentive to invest abroad because of the tax benefits.
Speaker: So that goes a little bit against.
Speaker: You just said there could be money flowing into Japan because it's quite cheap.
Speaker: But on the other hand, for the local investors, they might have an incentive to flow out, right?
Speaker: Correct.
Speaker: So that's something we will keep monitoring.
Speaker: And so far, it seems global investors have a strong appetite for Japanese equities.
Speaker: So there has been some inflows into Japanese equities that has canceled out the recent outflows from domestic investments abroad.
Speaker: But I mean, this is one of the risks to our view that Yen will actually strengthen and we'll keep monitoring it.
Speaker: So Lenny, I think we're going to take a break here and then we have to take a look at what this means for, for example, for equities and the rest of the region as well.
Speaker: So welcome back, Lenny.
Speaker: We've spoken about the prospects that the yen could really strengthen from here.
Speaker: And maybe this week is the start of that, potentially.
Speaker: Does that have implications for other currencies across the region?
Speaker: Yes, Harold.
Speaker: So to begin with, we think this Bank of Japan monetary policy change story is more or less unique to Japan.
Speaker: So we don't think this will have a great impact on regional currencies.
Speaker: But however, keep in mind that Asian currencies tend to move together.
Speaker: And when yen strengthens, some currencies will actually follow.
Speaker: So that means this could lead to a bit of strengthening in other regional currencies, but not too much.
Speaker: Okay, and I can understand this because if, for example, the yen is really weak, it's really cheap to buy products in Japan, then people buy products in Japan, but not in Korea, Taiwan.
Speaker: So the Taiwanese or the Koreans say, hey, our currency has got to go a bit weaker as well, right?
Speaker: Yes.
Speaker: That's what happens.
Speaker: That's why they move in packs.
Speaker: Exactly.
Speaker: So Harold, what is going on in Japanese equities?
Speaker: How do you think this changing in picture for the yen will impact?
Speaker: Yeah, no, this is really important.
Speaker: That's why I wanted to talk with you about this this week, Lenny, because this is really important for Japanese equities.
Speaker: The Japanese equity markets have performed very strong and people have been buying the Japanese stocks to a large extent because the yen was weakening and there's a lot of exporters.
Speaker: And as you mentioned, that j-curve effect, right, the exporters can do better.
Speaker: That's exactly what happens.
Speaker: Their earnings are moving higher.
Speaker: Their earnings are going up, and that's good for stocks.
Speaker: So if this currency starts to move in the opposite direction, then that whole trend might start to unwind.
Speaker: Then the earnings are starting to come down, and the attractiveness of the Japanese stocks is less.
Speaker: And then people will take money out of Japanese stocks.
Speaker: So that's why I think this is a really important, potentially important week, important event, what happens with the yen.
Speaker: Very interesting.
Speaker: So you mentioned that people might actually take money out of Japan.
Speaker: So I wonder where those money will go.
Speaker: In other words, how will that impact regional equities?
Speaker: Yeah.
Speaker: This impacts regional equities in a couple of ways.
Speaker: First of all, another story that's been relevant in Japan has been changes in corporate governance.
Speaker: And because the market has been weak, that's a theme that people like.
Speaker: So they're looking for a similar theme across the rest of the region.
Speaker: And they're looking at Korea because Korea is talking about this as well.
Speaker: But I think the interesting thing is that the Japanese stock market is big.
Speaker: So the outflows are big.
Speaker: So that cannot go to Vietnam because that's too small.
Speaker: There are only a couple of markets where they can really go to.
Speaker: And that's really Korea, Taiwan, mainland China and India.
Speaker: The interesting thing is that this week we've seen the Japanese stock market starting to come off a little bit.
Speaker: But the mainland Chinese stock market is starting to perform.
Speaker: So maybe some of that money goes from Japan to mainland China.
Speaker: Now this is again interesting for the rest of the region because the dynamics of flows across all these stock markets across the region are really potentially changing because of this.
Speaker: How that unfolds will be very difficult to forecast.
Speaker: My suspicion is that if you are right on the yen that it continues to strengthen, that there will be pressure on the Japanese stock market, that that money will flow in the rest of the region because a lot of the money came out of other parts of the region, and that potentially mainland China is going to be a beneficiary for this.
Speaker: So let's recap.
Speaker: The Bank of Japan is thinking about raising interest rates just at a time when the U.S. is lowering it.
Speaker: That means that the dynamics for the yen is going to change.
Speaker: The yen is going to be more attractive, a stronger yen.
Speaker: That might mean that that's not so good news for the Japanese equity markets in the near term.
Speaker: And if people would take money out, they might put it somewhere else in the region.
Speaker: They could, of course, also put it back into the US or other stock markets.
Speaker: But if it were in the rest of the region, yeah, maybe some of that flows to other countries.
Speaker: But mainland China could well be an option as well.
Speaker: So yeah, these movements in the end, it could really be a big thing for the rest of the year.
Speaker: So it was really important to talk to you this week, Lenny.
Speaker: Thanks for being on the podcast.
Speaker: Thank you very much for having me, Harold.
Speaker: And that brings us to the end of this edition of Under the Banyan Tree.
Speaker: Our sister podcast, The Macro Brief, is also available weekly.
Speaker: And a reminder that we're just a few weeks away from HSBC's Global Investors Summit, taking place here in Hong Kong from the 8th to the 10th of April.
Speaker: We'll be back again next week putting Asian markets and economics in context.
Speaker: Take care, till then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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