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This is a financial promotion for The First Sentier Japan Strategy. This information is for professional clients only in the UK and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back sigfsnificantly less than the original amount invested.
  • Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares. 
  • Single country / specific region risk: investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk. Smaller companies risk: Investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.

For details of the firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information.  

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund. 

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Part 6: The mythical correlation between Japan equities and a weak JPY

Dispelling the myths and misconceptions of investing in Japan

Throughout this six part series, we have hoped to address some of the most common investor concerns about Japan equities and highlight the opportunities for sustainable growth in this market. To round off this series, we today explore the mythical correlation between Japan equities and a weak JPY.


Part 6: The mythical correlation between Japan equities and a weak JPY

Foreign investment into Japan equities tends to be highly correlated with movements in the Japanese yen (JPY). Global investors typically buy Japan equities when the JPY is weak and sell when it is strong. Underlying these fund flows is the assumption that a weaker currency should mean stronger exports and higher overseas profits; therefore, a weaker JPY should mean that Japanese companies would perform well.

However, exports comprise just 16% of Japan’s total GDP (compared to 22% for China and 46% for Korea). On the other hand, personal consumption forms 60% of Japan’s GDP. This suggests that the correlation between corporate profit and foreign exchange should be much lower than global investors expect.

In addition, the historical data show that strong corporate profits have correlated with a stronger yen in at least six earnings cycles, while a weaker yen has done little to drive corporate profits. Since 1997 (at Japan’s peak GDP), the Japanese yen has cumulatively strengthened by 16% against the US dollar, while Japanese corporate profits have risen by 180%. This is because Japan’s trade balance – not financial flows – is the key driver for the JPY.

Nonetheless, the Japanese yen’s status as a “safe haven currency” can add to the volatility of the Japan equity market. Investors often buy JPY in response to international crises or negatively perceived global events, thus driving the value of the yen higher. As the yen strengthens, foreign investors (who form the majority of the Japan equity market) sell Japan equities – which suggests that Japan’s equity market performance is often driven by geopolitical events rather than underlying fundamentals.

Over the longer term, company fundamentals and long-term secular growth drivers have been much more important to corporate profits than the direction of the Japanese yen. On the other hand, this periodical disconnect between market prices and company fundamentals can provide long-term investors with excellent opportunities to accumulate high-quality companies at more reasonable valuations.

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered. It does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

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References to “we” or “us” are references to First Sentier Investors.

In the UK, issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK, issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First Sentier Investors ICVC, an open ended investment company registered in England and Wales (“OEIC”) or of First Sentier Investors Global Umbrella Fund plc, an umbrella investment company registered in Ireland (“VCC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC and VCC which are available free of charge by writing to: Client Services, First Sentier Investors (UK) Funds Limited, Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First Sentier Investors may be restricted in certain jurisdictions.

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First Sentier Investors entities referred to in this document are part of First Sentier Investors a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

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