Yen Volatility Weighs on Japanese Earnings Beats

The recent intervention by Japan and the US to stabilize the yen has left investors cautious about the impact of any further currency volatility on Japanese corporate earnings. Results have largely exceeded analysts' expectations this season, but not all have translated into share price gains, with some companies seeing their stock fall despite beating estimates.

Frank Benzimra, head of Asia equity strategy at Societe Generale, notes that the mood is cautious now and the yen is a risk to watch for the equity market. Equity investors are concerned about faster interest rate hikes by the Bank of Japan as the impact of the recent joint intervention wanes.

The yen's weakness has been a major driver of earnings beats by Japanese exporters in the past two years, especially as many firms had set their FX assumptions at stronger levels. However, with authorities showing determination to stabilize the yen, future earnings upgrades will need to be supported by stronger operating performance rather than favorable exchange-rate movements.

Manufacturers with strong demand pipelines, such as chip-gear makers, are expected to remain resilient even under a stronger yen, according to Chris Smith, a portfolio manager at Polar Capital. However, any sharp appreciation in the yen would exert widespread downward pressure on Japanese equities, Benzimra warns.