For several quarters ahead, we estimate that the Yen will remain range bound near the level of PPP (purchasing power parity), which is estimated to be between 90 to 95 Yen/USD. Though currency movements will be affected by various factors, we think the monetary policies of both Japan and the U.S. are the most important.
While the Bank of Japan (BOJ) is expected to adopt a more accommodative monetary policy, The Federal Reserve Bank (FRB) is also likely to accelerate the expansion of its balance sheet. Resistance from the international community against further depreciation of the Yen may intensify if Japan is considered to be implementing a deliberate weak Yen policy. Therefore, any further sharp depreciation of the Yen could meet resistance.
There are several long-term factors that could serve to weaken the Yen. These factors include Japan’s trade balance which has turned to a deficit, Japan’s demographic position with a falling birth rate and aging population, the low growth rate of the mature Japanese economy, increasing household exposure to foreign currency denominated financial assets, and geopolitical risks in the East Asia region.
On the other hand, there are factors that could halt the Yen’s slide. These include the Yen’s high interest rate in real terms (deflation or low inflation rate in Japan), Japan’s current account balance (including income balance) which remains in surplus, Japan’s substantial assets abroad (largest net creditor nation), public debt being financed domestically (no need to depend on foreign capital), possible success of “Abenomics” to enhance the potential growth rate of the Japanese economy, the Yen’s current level which looks weak enough from a real effective exchange rate perspective, and increasing investment by foreign investors into Japan’s assets. Also, the recent depreciation of the Yen may increase exports from Japan and may reduce the trade deficit.
Factors that might cause appreciation of the Yen include aggressive easing by the FRB if the U.S. economic recovery disappoints and purchasing the Yen due to “risk off” sentiment along with reemergence of the Euro debt crisis or deadlock regarding public debt ceiling issues in the U.S. However, the overall risk of Yen appreciation has decreased.
International investing involves certain risks and increased volatility not associated with investing solely in the U.S. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Securities focusing on limited geographic areas and/or sectors may result in greater market volatility. Investing in securities issued by smaller companies typically involves greater risk than investing in larger, more established companies.
Investors should carefully consider the investment objectives, risks, charges and expenses of each Fund before investing. This and other important information is contained in the Nomura Partners Funds, Inc. prospectus, which may be obtained by contacting your financial advisor, by calling Nomura Partners Funds at 1-800-535-2726, or visiting our website at nomurapartnersfunds.com. Please read the prospectus carefully before investing.
This report was prepared by Nomura Asset Management Co., Ltd. for information purposes only. Although this report is based upon sources we believe to be reliable, we do not guarantee its accuracy or completeness. Unless otherwise stated, all statements, figures, graphs and other information included in this report are as of the date of this report and are subject to change without notice. The contents of this report are not intended in any way to indicate or guarantee future investment results. Further, this report is not intended as a solicitation or recommendation with respect to the purchase or sale of any particular investment. This report may not be copied, re-distributed, or reproduced in whole or in part without the prior written approval of Nomura Asset Management Co., Ltd.
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