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Yen Correction and Carry Trade Unwind Seen as Positive for Japan’s Economy
Jesper Koll, a seasoned investor and expert director at Monex Group, expressed an optimistic outlook for the Japanese market, citing recent corrections in the yen and the unwinding of the carry trade as positive outcomes. Speaking during an appearance on CNBC’s “Squawk Box Asia,” Koll emphasized that these developments compel investors to reassess their strategies regarding Japan, moving beyond quick profit schemes to a more sustainable approach focused on the country’s real economic potential.
The unwinding of the yen carry trade accelerated last week in response to interest rate hikes by the Bank of Japan (BoJ), which reinforced the yen’s value and prompted a significant sell-off in global markets. “I actually think that the massive and violent correction that we got last week is actually quite healthy,” Koll remarked, further explaining that the previously weakened yen had propelled the Nikkei index to record levels.
Market Dynamics and Capitalism
Koll pointed out that assigning a price to money is essential for a functioning economy. He criticized the reliance on zero interest rates and heavy central bank involvement in government debt purchases, arguing that this arrangement strays from traditional capitalist principles.
Echoing Koll’s sentiments, former European Central Bank President Jean-Claude Trichet stated that the correction in the U.S. dollar against the yen was overdue and could ultimately foster healthier market conditions.
While Koll suggested that approximately 75% of the yen carry trade might have been unwound, he acknowledged the challenges in quantifying the total extent of this financial phenomenon. Following the dramatic losses experienced at the beginning of the week, the Nikkei 225 index rebounded sharply, climbing by as much as 3% on Tuesday.
Koll indicated that market jitters were primarily driven by apprehensions surrounding a potential hard landing for the U.S. economy and significant fluctuations in the U.S. two-year Treasury notes, rather than solely stemming from the BoJ’s recent rate increases.
Forward Outlook from the Bank of Japan
Shinichi Uchida, the deputy governor of the Bank of Japan, asserted that the institution must uphold its monetary easing policy amidst ongoing global volatility. Nevertheless, a summary of the BoJ’s monetary policy meeting that followed Uchida’s comments indicated a readiness among policymakers to consider further rate hikes.
Koll anticipates that the BoJ will not delay its shift towards normalization for much longer, projecting a policy interest rate of around 1.5% within the next year. This shift is expected to redirect attention from the unstable elements of Japan’s economy, associated with a prolonged period of ultra-low rates, toward the domestic market’s resilience.
He noted that corporate restructuring efforts and a steady increase in real wages bolster a bullish narrative for Japan. Notably, real wages experienced a growth of 1.1% in June year-on-year, marking the first wage increase in 26 months. This rise in wages signifies a potential turning point for Japan’s labor market and overall economic stability.
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