After an unexpected rebound in April, Japanese inflation started to fall again in May, no longer exceeding 3.2%, compared to 3.5% the month before.
This figure should reassure the Bank of Japan, firstly because it is, in absolute terms, much lower than what we know in the West and not so far from its objective, which is similar to that of the ECB and the US Fed, at 2.0% secondly, because it has been fighting deflation for decades and therefore does not necessarily see this inflation as a bad thing.
This allows Tokyo to leave its monetary policy unchanged, with a key interest rate still close to zero. However, at a time when key interest rates are promised to rise everywhere in the West, the growing interest rate differential that separates the Japanese bond market from that of Western countries is increasing.
This discourages foreign investors from investing in Japanese assets and, just as importantly, encourages Japanese investors to invest their money abroad where they can earn more attractive returns. These are all factors weighing on the yen, which is currently trading at multi-year minima against the euro, being very much undervalued against our currency as against the US dollar.
At current levels, the yen is helping to make Japanese equities very attractive, which also benefits from growing interest from foreign investors. The reasons are many: On the one hand, after the pandemic period, Japan is gradually rebounding. Secondly, in terms of governance, the country is making considerable progress.
Listed companies are asked to distribute the mountain of cash they sit by investing, distributing this money to shareholders, making share buybacks, or simply remunerating their employees more. This should put this fixed capital to work, giving the economy a welcome boost.
Japanese equities are present in all our portfolios
As for the Japanese government bond, whose yield is a priori not very attractive, it has two important assets. On the one hand, as assets denominated in yen are largely undervalued, they will sooner or later benefit from a return of the currency to levels closer to equilibrium. In addition, it is a haven par excellence.
As Japanese assets are repatriated abroad in the event of severe turbulence, Japanese bonds tend to appreciate when most other financial assets are struggling, so we reinforce our presence of Japanese shares going from 5% to 10% - we are more optimistic for this region -.
And therefore, we removed UK's 5% keeping a small and interesting diversification for any portfolio.
