The worst is yet to come for the Japanese yen – it could plummet 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 sometime in the next few months,” Koll told CNBC.Street Signs Asia” On Wednesday.
The Japanese yen fell to a 24-year low on Wednesday, standing at 144.35 against the US dollar – its weakest since August 1998.
The currency has since retreated slightly, trading around 144 against the greenback on Thursday.
Koll said the currency’s devaluation was one of the “more rigorous” and “easiest” to explain moves because it’s “based on real fundamentals.”
It’s the “most textbook currency move I’ve seen in 30 years,” he added.
Koll said that “two strong forces” will continue to weaken the yen: the widening interest rate differential between the US and Japan and Japan’s trade and current account deficits.
Unlike the US Federal Reserve, which has hiked interest rates more aggressively to curb inflation, the Bank of Japan (BoJ) has adopted a dovish monetary policy stance after many years of deflation.
Inflation would decrease the value of the yen by reducing its purchasing power.
“Inflation is likely to top 3 percent later this year, beating the central bank’s 2 percent target,” said Darren Tay, economist at Capital Economics Japan.
Inflation is relatively low at 3% — For example, inflation in the United States was 8.5% in July.
However, the BoJ “remains very firm on its stance that it will maintain ultra-loose monetary policy to boost inflation and support growth in Japan,” Tay said on CNBC’s “Squawk Box Asia” on Thursday.
Koll agreed with this analysis, saying the likelihood of the central bank raising rates is “close to zero”.
The BoJ is “committed to a free market in FX markets” and has “no evidence” why it should raise interest rates, he said.
When asked about Japan’s inflation outlook for the coming months, Koll said the BoJ’s CPI forecast for next year “could slip below 2%” and he would agree with that forecast.
The Central Bank said in late August that reaching 2% inflation would not be enough. Rather, the “ultimate goal,” she added, “is acceptable financial conditions to enable higher corporate profits and improved labor market conditions, thereby creating a virtuous circle in which wages and prices rise sustainably” – and easing monetary policy would help it achieve this Target.
But a weakening yen isn’t necessarily a bad thing — it could help Japanese companies become more competitive. And that’s partly because global supply chains will shift in Japan’s favor as more companies seek to increase imports from Japan.
1. Machine manufacturer
“If you can’t buy in China anymore, buy in Japan,” Koll said, advising investors to watch out for Japanese engineering companies, which would benefit from both the yen’s depreciation and changes in the global supply chain.
Keyence, a company that makes factory automation equipment, will be a “big beneficiary” of a weakening yen, he said.
Air conditioner maker Daikin is another for investors to watch, he added.
“It’s getting hotter all over the world… More and more homes will be getting air conditioning, and Daikin is really in a top pole position.”
The depreciation of the yen is also likely to attract more tourists to Japan who want to take advantage of its stronger purchasing power, said Ryota Tanozaki, CEO of restaurant chain Tabist.
Inbound travelers will have much more purchasing power due to the depreciating yen, Tanozaki said, noting that he is positive about 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 declined significantly over the past 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 further ease its Covid-19 travel measures and increase daily arrivals of foreign visitors.
Although the surge in tourist arrivals will help boost consumer spending in Japan, Tanozaki said higher energy prices are still a concern.
Companies in the utilities and food and beverage sectors will see the downside from the weakening yen as those industries rely heavily on imports, Koll said.
“I’m a little concerned about higher [prices] in oil and energy,” Tanozaki said. Yen depreciation and geopolitical tensions are becoming “problematic” for companies in the tourism sector as they face higher operating costs with the influx of tourists.