Japan fund managers ride out strong yen

The strong yen is not a major factor of concern for fund managers in the Japan equity sector, says Standard & Poor's Fund Services in its latest update.

"The consensus view among Japan fund managers we interviewed for this update was that currency issues are less important for corporate profits than an economic recovery," said Guy Boden, lead analyst at Standard & Poor's Fund Services.

A number of managers, such as Paul Chesson at Invesco and Simon Somerville of the Jupiter Japan Income Fund, noted that the yen is overvalued, but felt that Japanese corporates were handling it well.

"There was some concern over the effect on exporters," said Boden, "with some managers saying that an exchange rate of ¥80 to the US dollar would be a drag on the stock market."

Rob Weatherston at BlackRock, for example, said that exporters could experience earnings below consensus if the dollar went to ¥80, and Invesco's Chesson believes that the market will not rise substantially during a period of yen strengthening.

"The team at Orbis does not believe that Japanese exporters are especially cheap and has therefore been focusing more on domestic-oriented stocks. However some, such as Scott McGlashan of the JOHCM Japan Fund, have been finding opportunities as exporters sold off," added Boden.

However, James Salter, manager of the Polar Capital Fund, felt the effects on the export sector could be very harmful. "Salter believes that the strong yen is the largest problem affecting the Japanese stock market as the economic recovery has been led by the export sector," said Boden.

Several managers felt that the yen had peaked and would weaken in the coming months. Jupiter's Somerville, for example, has launched a currency hedged share class which has proved popular, while the team at GAM has hedged the US dollar, sterling and euro share classes between 60%-65% of assets.