In line with global investment markets, the Japanese equity market also fell in June. Inflation continued to pose as a threat, and fears of recession resulted in deterioration of the market sentiment.
The Japanese Yen further depreciated against the Dollar, over the month of June, the Nikkei 225 lost 3.25% (8.33% in US$ terms), while the TOPIX index was 2.19% lower (7.32% in US$ terms).
Monetary policy in Japan remains one of the loosest globally, the widening interest rate differential between the Yen and the rest continued to exert pressure on the currency itself. The Yen depreciated 5.19% against the Dollar, which will have impact on the Japanese economy. Due to the weaker currency, inflation is felt in Japan, with the YoY CPI figure hitting a 7 year high. The drop in household expenditure is also reflects this very issue, as the rising prices eat into the buying power, which will in turn weaken the economic growth.
Certainly, exporters do benefit from the cheaper currency, the consumer discretionary sector could also perform relatively well as Asia reopens after COVID, and tourism is revitalised. However, the overall market will still likely face more external headwinds as corporate margins continue to be compressed and domestic spending is muted. More importantly, despite the continued monetary support from the Bank of Japan, due to the depreciation of the Yen, total return in foreign currencies such as the Dollar will be compressed. With the conflicting forces present, we continue to stay relatively neutral on the market’s outlook.