Morning Update

In Japan: policymakers are having to be creative after a continued weakening of the Yen hasn’t been stopped by central bank intervention in FX markets.

In a turbulent few days, the Bank of Japan was forced to intervene and directly buy $35bn worth of Yen in the FX markets on Monday to try and prop the currency up.

The move came after the currency fell to a long-term low last Friday when policy makers kept interest rates on hold and gave no indication they’d be raising them anytime soon. This sentiment isn’t helpful when their central bank peers have rates 4-5% higher than the BoJ.

The market intervention has only worked briefly, and the Yen is back on the ropes.

Now, policymakers are considering offering tax breaks to Japanese companies that repatriate overseas profits and convert them back to the Yen. This persistent Yen buying would naturally prop up the currency and save the central bank using its own FX reserves – which are no doubt plentiful, but ultimately finite.

Much like the UK’s FTSE100, the Nikkei is made up of companies that generate a huge amount of profit outside of their home country. This means that a weak reporting currency (Yen) makes overseas profits and assets more valuable when revalued coming reporting time and as such has been partly responsible for the Nikkei index hitting record highs.

We’d hypothesise that a tax break would be supportive of share prices for a time, but if this were to strengthen the Yen then we could see the market normalise a little as the value of foreign earnings deflates. If this were to happen, we also think it’s going to take some time to legislate and that the Yen might have a rocky road ahead of it.

The latest nationwide house price index released this morning has indicated that residential properties have risen 0.6% on an annualised basis. This marks the third consecutive month where house prices rose on a year-on-year basis and comes in contrast to the period between February 2023 and January 2024 which saw 12 consecutive months of house prices retreating.

While annualised house prices rose in April, they did so at a slower pace than both March (at 1.6%) and February (at 1.2%).

On a month-on-month basis, house prices fell 0.4%, again marking a rise in the rate of retreat from last month where prices fell 0.2%.

Citing the data, Nationwide’s Chief Economist Robert Gardner said that “The slowdown likely reflects ongoing affordability pressures, with longer term interest rates rising in recent months, reversing the steep fall seen around the turn of the year. House prices are now around 4% below the all-time highs recorded in the summer of 2022, after taking account of seasonal effects.”

With a recent report from Census wide on behalf of Nationwide suggesting that just under 50% of prospective first-time buyers were holding off their plans to buy over the past year, they same report commented how “55% of respondents said they would be willing to buy in another part of the country where house prices are cheaper”.

In the US, Amazon announced bumper earnings after the closing bell yesterday, beating expectations by about 20%. The company saw very modest revenue growth, but earnings were bolstered by recent cost-cutting measures and efficiency drives – read 27,000 employees laid off since Q4 2022.

Despite the outsized win, the market was tepid with the stock, having moved it 3% lower before the closing bell and is up only around 1.5% in after-hours trading. The market will no doubt be impressed by what Amazon and its tech cohort are delivering, but these numbers are being offset by expectations that interest rates aren’t going lower anytime soon, which affects the future value of money and therefore decreases the future value of earnings.