[Super Enjeo]⑧"If You Are Stuck with Yen, Wait for 1 Year... Profits Possible Only with Long-Term View"

The Yen Depreciation Phenomenon Expected to Continue Until 2026
Foreign Exchange Investments Should Be Viewed Long-Term for Profitability; Japanese Stock Market Investment More Advantageous Than Yen
Interview with Japan Specialist Analyst, Kim Chaeyoon, NH Securities Senior Researcher

Kim Chaeyoon, Senior Researcher at NH Investment & Securities (Photo by Lee Changhwan)

"The widening interest rate gap between the United States and Japan is causing the yen depreciation phenomenon to last longer than expected. Yen investments need to be viewed as long-term, over one year, to yield profits."

Kim Chaeyoon, a senior researcher at NH Investment & Securities, met with Asia Economy on the 4th in Yeouido, Seoul, and said, "As the U.S. sharply raised its benchmark interest rate, the interest rate gap with Japan widened, and recently, the expected timing for the U.S. to cut rates has been delayed, prolonging the yen depreciation phenomenon."

He graduated from a university in Japan and worked at local securities firms such as Mitsubishi UFJ Morgan Stanley Securities and Tokai Tokyo Securities before transferring to Korea, making him the only Japan specialist analyst in Yeouido.

Kim emphasized, "The U.S. is not expected to cut its benchmark interest rate rapidly, and Japan is also unlikely to raise rates quickly, so the yen depreciation phenomenon could continue until 2026."

He predicted the yen-dollar exchange rate band for the second half of this year to be between 143 and 159 yen. This means the yen-dollar exchange rate, currently moving around 155 to 160 yen, is not expected to drop significantly in the latter half of the year.

He analyzed that although the Bank of Japan (BOJ) is trying to ease the severe yen depreciation, it has limited tools to use. "Since 2022, the BOJ seems to have intervened in the market more than five or six times, but the effects are diminishing," he said. "The market understands that the weakness of the yen is not due to yen-specific issues but because the U.S. raised interest rates, inevitably causing a strong dollar and a weak yen."

Ultimately, the yen depreciation is expected to ease only if the U.S. actively lowers its benchmark interest rate, but such a period is unlikely to come in the short term.

He also advised individual investors investing in Japan that, at this point, investing in the Japanese stock market would yield better returns than investing in the yen. The Japanese stock market has been hitting new highs recently.

Kim predicted, "The Japanese government is expected to implement strong economic stimulus measures to overcome the yen depreciation and boost economic growth." He added, "I am focusing on sectors that will benefit from Prime Minister Kishida's vision of a science and technology powerhouse, such as AI (artificial intelligence) semiconductors, eco-friendly infrastructure, decarbonization, and finance."

Japanese yen displayed at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Jin-Hyung Kang aymsdream@

The following is a Q&A with Senior Researcher Kim Chaeyoon.

- The yen depreciation phenomenon is worsening more than expected. What are the main causes of the yen depreciation continuing this year?

▲ The biggest factor behind the weak yen is the widening interest rate gap between the U.S. and Japan. As the U.S. raised interest rates, Japan, which was the only major advanced country pursuing monetary easing, saw the interest rate gap widen. This caused a strong dollar and a weak yen.

- Despite improvements in the Japanese economy and significant increases in wages and prices this year, why does the yen depreciation continue?

▲ It is true that there have been considerable wage increases in Japan this year and that the inflation rate exceeded 2% at the beginning of the year. However, it is not yet confirmed whether wage increases have translated into actual consumption, and the BOJ's future inflation forecast remains below 2%, a low level. Therefore, Japan's monetary easing policy is expected to continue for the time being, which is a cause of the yen depreciation.

- How long do you expect the yen depreciation phenomenon to last?

▲ I expect the current yen depreciation to continue until 2026. This is because the U.S. is not expected to cut benchmark interest rates sharply, and Japan is also unlikely to raise rates rapidly. The interest rate gap between the two countries is expected to narrow gradually. The yen-dollar exchange rate is considered a yen depreciation if it is above 125 yen, and I expect it to move above 125 yen for several years.

- What range do you expect the yen-dollar exchange rate to move within in the second half of the year?

▲ Even if the BOJ raises its benchmark interest rate, the yen's appreciation is expected to be limited. The expected yen-dollar exchange rate band for the second half of this year is 143 to 159 yen.

- It is said that the yen depreciation has worsened as more "Seohak Gaemi" (Korean investors investing overseas) appear in Japan. What is the situation of Seohak Gaemi in Japan?

▲ Currently, about 70% of new investors in Japan seem to be investing overseas. This is partly due to the Japanese government's revision of NISA (Nippon Individual Savings Account) starting this year, which increased the tax-exempt limit for small investments. As tax benefits increased for NISA, overseas investments have risen, especially among younger people. However, the amounts are not large, so the impact on the yen depreciation phenomenon may be smaller than other factors.

- What is the direction of the yen carry trade?

▲ Since COVID-19, Japan has expanded foreign direct investment (FDI) focusing on entering consumer markets and reorganizing production bases. Considering overseas investments centered on FDI, it is difficult to say that the yen carry trade is being rapidly unwound despite the BOJ's tightening moves.

- What is your view on the analysis that the BOJ cannot easily raise benchmark interest rates due to the Japanese government's large debt?

▲ That is a valid point. However, government debt is an old issue and is not expected to cause immediate major problems. The market expects the BOJ to raise benchmark interest rates by 0.25 percentage points in July and September this year. Even with two hikes, the rates will remain very low, so it is unlikely to significantly impact government debt or the market.

- There are also stories that international speculators are attacking the Japanese yen because the Japanese government is unable to actively respond to the yen depreciation for various reasons. What do you think?

▲ That is a plausible story because the BOJ has few tools to respond to the yen depreciation. Even when intervening in the market, the effects do not last long. Since 2022, the BOJ seems to have intervened in the market five or six times, but the duration of the effect is getting shorter. The market understands that the yen's weakness is not due to yen-specific problems but because the U.S. raised interest rates, inevitably causing a strong dollar and a weak yen.

- Do you think the yen depreciation is negative for Korean industries?

▲ It is true that Japanese companies' products have gained price competitiveness in international markets due to the yen depreciation. However, Japan's strengths are limited to manufacturing materials, parts, equipment, and automobiles. On the other hand, Korea excels in IT software and similar areas, so there are many non-overlapping sectors. It cannot be viewed as entirely negative.

- Recently, more "Ilhak Gaemi" (Korean individual investors investing in Japan) have increased investments in yen and Japanese stocks. Many investors are suffering losses due to the yen depreciation. Do you have any advice?

▲ Yen investments should fundamentally be viewed as long-term, over one year. Since it is an advanced market, short-term investments are not appropriate. Over the long term, the yen value is expected to rise. Currently, investing in Japanese stocks is better than investing in the yen because the Japanese economy is expected to improve. The Japanese government is expected to implement strong economic stimulus measures to overcome the yen depreciation and boost economic growth. It is better to buy stocks in sectors that will benefit from this process.

- If investing in the Japanese stock market, which sectors or companies should be considered?

▲ I am focusing on Prime Minister Kishida's vision of a science and technology powerhouse. I highly recommend AI (artificial intelligence) semiconductor, eco-friendly infrastructure, decarbonization, and finance-related stocks. For AI semiconductors, there are Tokyo Electron and Mitsubishi Electric, and for infrastructure, Mitsubishi Heavy Industries and Kawasaki Heavy Industries.