Nomura Asset Management CIO says further sharp yen gains unlikely

LONDON : A recent surge in the yen means profit growth at Japanese companies may disappoint, while a further sharp appreciation in the currency is unlikely, said Nomura Asset Management’s CIO.
The yen has strengthened more than 10 per cent to around 144 per dollar since hitting 38-year lows in July, hurting many heavyweight exporters on Japan’s stock index.
“When the exchange rate was at 160, some people expected corporate profit growth could be in double digits,” Yuichi Murao told a press briefing in London on Thursday.
“But we’ve had a 20-yen appreciation… so the double-digit growth anticipated is now more likely to come back to 5-6 per cent growth if we assume the current level of exchange rate,” said Murao, adding further significant appreciation was unlikely.
“Over the next 6-12 months, the 135-140 range would be reasonable,” said Murao.
A yen surge and Nikkei rout in early August surprised markets, as expectations for rising Japanese rates and a ramping-up in bets on U.S. rate cuts sparked a sharp unwind of popular yen carry trades.
In a carry trade, an investor typically borrows money in a low-rate currency to invest in higher-yielding assets.
Nomura Asset Management’s senior client portfolio manager Andrew McCagg, also speaking at the event, said there was not enough data to say definitively how much of the carry trade had been unwound, but estimates of 50 per cent-60 per cent seemed fair.
Nomura Asset Management manages around $546 billion in assets.
Murao said he did not expect the BOJ to hike interest rates aggressively, but it was likely to raise rates again later this year or early next year to contain inflation.
The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25 per cent in July.
Murao noted the gap between U.S. and Japanese rates, currently 5 per cent, was unlikely to fall significantly anytime soon.
“We have noticed that historically, carry trades make sense if the (US/Japan rate) gap is 4 per cent or more,” he added. “We think it will be above 4 per cent until at least the middle of next year.”
On merger and acquisition activity, Murao said there were still lots of undervalued companies in Japan.
“The difference between past acquisitions and the recent acquisitions is that most of these buyers are long-term business oriented companies,” Murao said.
Canada’s Alimentation Couche-Tard last month said it had approached 7-Eleven convenience store operator Seven & i about a potential takeover, in what would be the largest-ever foreign buyout of a Japanese company.