The worst is not over for the Japanese yen — it could plummet even further in the coming months, according to Jesper Koll, director of financial services firm Monex Group.
“I think the parabolic overshoot is still on track, so I expect we’re going to see 150, 160 at some point over the next couple of months,” Koll told CNBC’s “Street Signs Asia” on Wednesday.
The Japanese yen slumped to a 24-year low on Wednesday, and stood at 144.35 against the U.S. dollar — the weakest it has been since August 1998.
The currency has since pulled back slightly and traded around 144 against the greenback earlier on Thursday.
Koll said the depreciation of the currency is one of the more “rigorous” and “easiest” moves to explain because it is “based on real fundamentals.”
It is the most “textbook-driven currency move I’ve seen in 30 years,” he added.
Koll said “two powerful forces” will weaken the yen even further: the widening interest rate differential between the U.S. and Japan and Japan’s trade and current account deficit.
In contrast to the U.S. Federal Reserve, which has been hiking interest rates more aggressively to control inflation, the Bank of Japan (BoJ) has been taking a dovish stance on monetary policy after many years of deflation.
Inflation would decrease the value of the yen by reducing its buying power.
“Inflation is likely to breach 3% before the end of this year, above the central bank’s 2% target, said Darren Tay, economist at Capital Economics Japan.
Inflation at 3% is relatively low — inflation in the United States, for example, was at 8.5% in July.
However, the BoJ “remains very steadfast in its stance that it is going to maintain its ultra easy monetary policy in order to spur inflation and to support growth in Japan,” Tay said on CNBC’s “Squawk Box Asia” on Thursday.
Koll agreed with that analysis, saying that the likelihood of the central bank raising rates “is close to nil.”
The BoJ is “committed to a free market in the currency markets” and has “no smoking gun” as to why they should increase interest rates, he said.
When asked about Japan’s inflationary outlook for the coming months, Koll said the BoJ’s forecast for consumer price inflation next year could “go back down to below 2%,” and he would agree with that prediction.
The central bank said in late August that reaching 2% inflation would not be enough. Rather, the “end goal,” it added, is for “accommodative financial conditions to facilitate higher corporate profits and improved labor market conditions, and thereby generate a virtuous cycle in which wages and prices see sustained increases” — and easing monetary policy would help it achieve that aim.
But a weakening yen is not necessarily a bad thing — it could help Japanese companies become more competitive. And that’s partly because global supply chains are set to shift in Japan’s favor as more companies look to increase their imports from Japan.
1. Machinery manufacturing companies
“If you cannot buy from China anymore, you’re gonna buy from Japan,” Koll said, recommending that investors pay attention to Japanese machinery companies that would benefit from both the yen depreciating and changes in the global supply chain.
Keyence, a company that manufactures factory automation equipment, will be a “huge beneficiary” of a weakening yen, he said.
Air-conditioning manufacturing company Daikin is another one investors should look out for, he added.
“It’s getting hotter everywhere in the world … More and more households are going to equip themselves with air-conditioners and that’s where Daikin is really in a top pole position.”
The yen’s depreciation is also likely to attract more tourists to Japan who want to take advantage of their stronger spending power, said Ryota Tanozaki, CEO of hospitality chain Tabist.
Inbound travelers will have much more purchasing power because of the depreciating yen, Tanozaki said, noting that he is positive on the weakening currency.
Japan has a “variety of unique assets” such as its cuisine, transportation system and traditions that would attract foreigners to visit the country at a cheaper price, he said.
Tourism spending in Japan has plunged significantly in the last two years, but Koll is optimistic that Japan will follow in Taiwan’s footsteps and resume visa-free entry for visitors from some countries.
The Japanese government announced on Wednesday that it would relax more of its Covid-19 travel measures and increase the daily foreign visitor arrivals.
Nevertheless, although the uptick in tourist arrivals will contribute to consumer spending in Japan, Tanozaki said higher energy prices are still a cause for concern.
Companies in the utility and food and beverage sectors will experience the downside of the weakening yen because these are the industries that rely heavily on imports, Koll said.
“I’m a little bit concerned about higher [prices] in oil and energy,” Tanozaki said. Yen depreciation as well as geopolitical tensions will be “problematic” for businesses in the tourism sector as they would have to incur higher utility costs with the influx of tourists.