Flash Macro: Japan Update

We have been receiving a slew of questions on Japan after the recent surge in its currency from historically cheap levels, especially given KKR's sizeable investment footprint in the country. See below for details, but our punch line is that the JPY carry trade unwind was really about a mis-position of investment expectations (i.e., U.S. rates falling faster and Japan rates moving up more abruptly than some investors were thinking) than a fundamental breakdown in the country’s positively shifting macro story. In fact, the sharp appreciation of the yen in recent weeks is actually a sign that the macro backdrop is strengthening both from a cyclical and structural perspective. In particular, we are encouraged that Japan now has enough growth and inflation in the system to begin to normalize its monetary policy after multiple decades of anemic growth and deflation.

EXHIBIT 1: Rapid Unwinding of Record-High Yen Shorts Amid Yen Surge on the Disappointing U.S. Jobs Data and BoJ Slightly Hawkish Shift

Yen Short Position vs. USDJPY

Nonetheless, we fully acknowledge that this transition will take time, and there could be bumps along the way. The BoJ clearly understands that patience will be required, as evidenced by its commentary that “we will not raise rates when markets are unstable.” Beyond normalization of its monetary policy, Japan also needs greater productivity and more immigration as it looks to offset a material decline in its working age population. 

However, despite these hurdles, we retain our optimistic outlook on Japan. Simply stated, attractive valuations, rule of law, an intense focus on corporate reform and appealing funding costs all still make this country one of the more unique destinations for patient capital.