In Japan, inflation may have yet to reach the highs in the West, but it doesn't remain easy to dislodge. In June, 3.3%, a distance from the peaks of more than 4%, reached the beginning of the year but slightly progressed against 3.2% in May.
Naturally, investors are wondering what will be the reaction of the Bank of Japan, whose monetary policy has changed little, despite inflation which far exceeds its target of 2.0%. Unlike many other countries, the Bank of Japan has never raised policy rates to -0.1% since… 2016! The only recent adaptation (dating from December 2022) is widening the tolerance band for Japanese rates at ten years. While the target remains unchanged - 10-year rates at 0.0% - the Bank of Japan has since allowed a tolerance of 0.5%, allowing interest rates to stabilise around the same 0.5% level since the beginning of the year.
This ultra-expansionary monetary policy at a time when critical Western interest rates remain upward weighs on the yen. After an attempt to rebound, the Japanese currency fell back to more than 157JPY for €1, a level close to the multi-year minima established a few.
But neither high inflation nor low yen are particularly displeasing to the Tokyo authorities. For decades, they have been fighting the risks of deflation. After years of inflation well below targets, they are coping well with current levels. At the same time, the yen's weakness is likely to prevent Japanese exporters from taking advantage to increase their competitiveness.
With inflation trending slightly worldwide, everything points to Japan following suit, giving the Bank of Japan the leeway to keep its monetary policy unchanged. Therefore, a natural rebound in the yen is not imminent and will be mainly linked to the expected fall in key interest rates and other interest rates in the West from 2024. When the latter fall, the interest rate differential separating Japan from the rest of the world will be eroded, and the yen will benefit.
In the meantime, we continue to take advantage of the yen's weakness to buy Japanese financial assets at a reasonable price. At this stage, they integrate our diversified portfolio.