Best Investment Advice Now that the Yen is Weak and Inflation is High

The rapid depreciation of the yen has not stopped. At the beginning of March this year, the yen was ¥115 to the dollar, but on March 28, it temporarily broke through the ¥125 level for the first time in six years and seven months. On April 11, it returned to the 125-yen level again, and it has become commonplace for the yen to hover around the “Kuroda line,” which is recognized as the bottom of the yen range.

 

Traditionally, the yen was considered a safe-haven asset and tended to appreciate in times of crisis, such as Russia’s invasion of Ukraine. The reason why this is no longer the case is due to deep-rooted structural causes, such as the interest rate differential between Japan and the U.S. and Japan’s chronic current account deficit. There is no easy solution, and it is safe to assume that the yen will continue to weaken for the foreseeable future, and it would not be surprising to see the yen move above the 135 yen per dollar level to around 160 yen per dollar,” said Hisayoshi Watanabe, a stock critic.

Japan is in a state of real inflation due to the weak yen and global price hikes of raw materials. However, the current situation is “not as bad as expected,” with the Nikkei Stock Average recovering to the 28,000-yen level at the end of March. This is partly due to the Bank of Japan’s buying support, but also because of the concentration of foreign investors’ money in Japan. According to Mr. Norifumi Okayama, President of Market Bank, “The current Japanese stock market is not falling as far as foreign investors are concerned.”

“In the three weeks through March 25, foreign investors bought 1.429 trillion yen of Japanese stock futures. They have since oversold stocks that have risen in price, and are now buying cash stocks that have become undervalued again. With the yen on such a weak trend, attention is focused on companies that will benefit from higher exports.”

In these uncertain times when we don’t know what will happen to the value of the yen, why not start investing in stocks with a weak yen? Let’s take a look at each topic to see where to target.

First, we will look at stocks related to video games, which continue to hold an overwhelming global appeal. Securities journalist Hiroaki Konno has the following to say.

“Capcom, whose “Monster Hunter” and “Resident Evil” have become global video game titles, accounts for about 50% of overseas sales. Unlike most manufacturing companies, Capcom is not adversely affected by the high cost of raw materials, and further development of its IP (intellectual property) business and the Metaverse field is also expected.”

Nintendo, a major player in the video game industry, has also been resilient. Shigeki Unozawa, a securities analyst, explains.

Shigeki Unozawa, a securities analyst, says, “Although it is a royal road, Nintendo is a company that cannot be missed. The U.S. accounts for about 40% of the company’s sales, and the weak yen is particularly beneficial. The current share price is not cheap, but I believe there is still upside potential. Five years have passed since the launch of the “Nintendo DS” and new titles have been released, but it is about time that expectations for the next generation of game consoles are rising.”

“Conversely, food-related stocks are expected to see their sales increase due to soaring raw material prices.” Mr. Konno explains.

“Sakata Seed Corporation is one of Japan’s top seed and seedling manufacturers, with overseas offices in 21 countries and operations in more than 170 countries. The fact that overseas sales account for about 60% of our total sales is also attractive. The invasion of Ukraine has affected the price of wheat, but the prices of other agricultural products are also rising worldwide, and will be increasingly valued in terms of both domestic and foreign demand. In general, food is a business category that is less susceptible to economic fluctuations and rising interest rates, so this is the perfect time to get in on the action.”

Japan’s wheat self-sufficiency rate is approximately 15%, and according to the Ministry of Agriculture, Forestry, and Fisheries, the average government selling price of major wheat imports was increased by 17.3% in April of this year. Under these circumstances, the value of rice, which supports Japan’s dining table, is once again rising. Stock analyst Katsumi Sato cites one stock.

Yamatane, a semi-major player in warehousing and logistics services, is also known as a major wholesaler of milled rice. With global wheat prices soaring and the yen even weakening, the value of domestically produced rice, which is unaffected by exchange rate differences, is being reevaluated. The high price of wheat in 2007-2008 and the precedent of reevaluating the rice diet will also increase the presence of Yamatane.

Surprisingly, did you know that stocks of Japanese companies that manufacture sewing machines are being actively bought? Sewing machine-related stocks are so-called “economy-sensitive stocks,” which are bought with a medium- to long-term perspective in the hope that the economy will improve and demand for clothing will increase. And Japan has many world-class sewing machine manufacturing companies. The aforementioned Mr. Unozawa cites some of the most undervalued stocks among them.

Pegasus Sewing Machine Mfg. was founded in 1914 and boasts a 40% share of the global market for industrial sewing machines. The P/B ratio, which is considered undervalued at less than 1x, is still around 0.6x, so there is still room for valuation. 

Pegasus has a business alliance with JUKI, the world’s leading manufacturer of industrial sewing machines for apparel. JUKI is a global company with overseas sales accounting for more than 80% of its total sales.

JUKI acquired the surface mounters (devices that place electronic components on substrates) division from Sony in 2013, and its market share has been growing. The rapid depreciation of the yen is expected to improve profits by several billion yen if the current rate of exchange continues.

 

Although the complete containment of the new coronavirus is still uncertain, restrictions on entry into Japan are gradually being lifted. When the number of foreign tourists who come to buy “cheap Japanese” goods and services eventually increases, inbound-related stocks should soar. The aforementioned Mr. Unozawa said, “The Hotel Chinzanso Tokyo is a very popular hotel in Japan.”

 

“Fujita Kanko, which operates the Hotel Chinzanso Tokyo and other hotels, has suffered major damage to its mainstay business hotels, but its resort business in the Hakone area, which is the source of domestic demand, is showing a steady recovery. If inbound demand revives, the company is likely to become popular again. Kyoritsu Maintenance, which operates the ‘Dormy Inn’ hotel, also has high expectations for inbound demand, as its Japanese-style business hotel ‘Onyado Nono’ and others are popular among foreign tourists. The occupancy rate of dormitories, which are the company’s two mainstays, has been declining due to the impact of Corona, and how the company maintains this business should change its performance.”

Finally, weak yen stocks often focus on automobile-related export companies such as Toyota Motor Corporation, but what about the current situation? Mr. Sato, says as follows: “Toyota is a company that has been in the market for a long time.”

“A one yen depreciation against the assumed exchange rate is said to boost Toyota’s operating profit by 40 billion yen against the dollar and 7 billion yen against the euro. Honda and Nissan Motor have similar earnings boosts, but I would guess Toyota, which is focusing on electric vehicles. Similarly, Bridgestone, which boasts the world’s second largest tire market share, is another company that will directly benefit from the weak yen.”

The current depreciation of the yen is completely different from what Japan has faced in the past. A safe investment over the medium to long term would be to buy stocks that are both export-related and recession-proof, which will benefit from the yen’s depreciation.

From the April 29, 2022 issue of FRIDAY