We recently indicated on March 14, 2013 that we believed the Yen would remain range bound near the level of PPP (purchasing power parity), which we estimated to be between 90 to 95 Yen/USD. We wrote at the time that though currency movements will be affected by various factors, the monetary policies of both Japan and the U.S. are the most important.
While we expected the Bank of Japan (BOJ) to adopt a more accommodative monetary policy, we were surprised by the BOJ’s announcement on April 4, 2013 to aggressively target a 2% inflation rate by doubling the monetary base over a period of two years and shifting the average maturity of government securities purchased by the BOJ towards 7 years. The actions of the new head of the BOJ were unusually far reaching and as a result, the Yen depreciated from 93.4 (as of April 3, 2013) to 99.0 (as of April 9, 2013). In addition, stock market investors reacted positively with the Nikkei 225 Stock Average and TOPIX (Tokyo Stock Exchange Price Index) up 6.7% and 9.1%, respectively (data from April 3, 2013 to April 9, 2013).
In the long run, we estimate that the Yen will remain range bound, trading between plus or minus 10% of the above mentioned PPP level. At the same time, since expectations for the Yen weakening are likely to be maintained for the time being, we forecast that the Yen is likely to remain on the weaker side of the trading range i.e., 95-105 Yen/USD.
It should be noted that there continues to be factors that could halt the depreciation of the Yen as indicated in our previous piece dated March 14, 2013. 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), the 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 Federal Reserve Bank 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.
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.
The Nikkei 225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Tokyo Stock Exchange Price Index (TOPIX) is an unmanaged capitalization weighted measure (adjusted in U.S. dollars) of all shares listed on the first section of the Tokyo Stock Exchange. One cannot invest directly in an index.
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. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. 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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