A confluence of a stronger dollar, inflation fears, and the Omicron variant have put downward pressure on the Japanese yen, but it could present value-hunting investors with a bargain.
As supply chains around the world regain momentum following a global vaccination movement in 2021, the Omicron variant has presented another speed bump: It’s feeding pessimism into Japan’s largest manufacturers.
“Japan’s biggest manufacturers are less optimistic about the coming months as uncertainty over the omicron variant tempers bullishness, according to a Bank of Japan survey that likely underplays the full degree of concern,” Bloomberg reports.
Why the pessimism? It appears that Japan hasn’t quite bounced back from last year’s apex of the ongoing pandemic, according to market experts.
“The Bank of Japan’s latest Tankan survey pointed to an uneven recovery… With growing concerns over the risks from the omicron variant, we expect the central bank to extend its Covid-19 fund support program beyond its March expiry,” said economist Yuki Masujima.
Nonetheless, Bloomberg notes that the Tankan survey revealed that the economy was in the midst of healing despite faltering last quarter (the first time in eight quarters). The survey also showed that large companies would boost their capital investments by 9.3%.
“Overall the data does show that companies are confident about the recovery,” said economist Atsushi Takeda at Itochu Research Institute. “Large manufacturers have managed to maintain a high level of activity, and particularly with capex, we’re seeing an improvement in general machinery reflecting confidence.”
Tread Lightly, Know the Risks
With the data showing something of a push-pull dichotomy, it’s best to tread lightly when it comes to the Japanese yen. One way to play it is to confine the yen in the wrapper of an exchange traded fund (ETF) like the Invesco CurrencyShares® Japanese Yen Trust (FXY), which is designed to track the price of the Japanese yen.
Investors can avoid the heavy price volatility that would come with trading the spot price currency on a foreign exchange platform. That’s especially the case when the central bank (the Bank of Japan or BOJ) is meeting this week to decide how to proceed with COVID stimulus measures.
“It will probably be hard for the BOJ to completely finish the whole Covid funding program, but it’s possible that they start lowering the purchase of corporate bonds and commercial paper as today’s Tankan continues to show funding conditions remain favorable,” said economist Kazuma Maeda at Barclays Plc.
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