What is the impact of the yen trade on earnings? Jefferies weighs By Investing.com

Investing.com– The Japanese yen strengthened sharply over the past month as the Bank of Japan began raising interest rates, sparking a rapid recovery in yen trading that spurred strong capital flows into broader risk-averse markets.

Analysts at Jefferies said a regime change in the yen was imminent and long positions on the rising yen could impact corporate earnings in Japan.

Jefferies said historical data showed the yen strengthened by an average of 25% during an ongoing carry trade, while setting an optimum level of ¥140.

But further economic weakness in the US economy could prompt more rate cuts and see USDJPY fall as low as ¥120, Jefferies said.

The brokerage said that every 10 percent appreciation in the yen leads to a 5 percent cut in annual earnings over the next one to two years.

But during “periods of global crisis, the impact is magnified to as much as 20% reductions in earnings due to Japan’s high operating leverage.”

Export-oriented sectors are likely to be most affected by this trend, while sectors with domestic exposure are likely to gain.

Japan and indices tumbled in early August, with Jefferies saying markets currently saw a 5% earnings cut and USDJPY at 146.

Jefferies says Japan is overweight due to persistent yen strength

But despite the potential short-term impact of the yen’s appreciation, Jefferies said investors should be overweight Japan if the yen’s strength cycle remains persistent.

Historical data has shown that while Japanese markets have declined against the local currency during periods of strong yen, they have appreciated substantially against the dollar.

The brokerage noted that low-risk and quality stocks could benefit from a stronger yen, particularly sectors with domestic income exposure.

Jefferies said real estate, food and beverage, energy, consumer services, media and discretionary stocks could benefit from a stronger yen.