impact of yen on japanese stocks (jul 2011)

8/3/2019 Impact of Yen on Japanese Stocks (Jul 2011)

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msci.com

ResearchInsight

ImpactofYenonJapaneseStocks

DavidT.Owyong,PhD

July2011


2/11

MSCIResearch msci.com2011MSCI.Allrightsreserved.Pleaserefertothedisclaimerattheendofthisdocument

ResearchInsighImpactofYenonJapaneseStock

July2011

2 of11

ThispaperconsidersthechangingvalueoftheyenanditsimpactontheJapanesestockmarketduring

thelastthreedecades,andweexaminehowthiscurrencysensitivityvariedsubstantiallyacrossJapanese

firmsovertheobservedperiod.Inaddition,theresponsetoarisingorfallingyenwasfoundtobe

asymmetric.Thedispersionofyensensitivityalsovariedovertime,whichhaspotentialimplicationsfor

thepassiveactiveinvestmentdebateundervolatileexchangerateconditions.Finally,yensensitivitywas

alsofound

to

contribute

substantially

to

stock

volatility.

IntroductionJapanisknownfortheexportdrivennatureofitseconomyand,giventheimportanceoftheexchange

rateindrivingexports,theyenisthereforecloselymonitoredbyJapanesecompaniesandpolicymakers

alike(HashiandIto(2009)).Inthelastfewyears,theyenhasbeenonanappreciatingtrend,andeven

reachedanewhighintheaftermathoftherecentearthquakeinMarch2011(BloombergNews,Jun21,

2011). Giventhisbackdrop,itisworthinvestigatingthehistoricalrelationshipbetweentheyenandthe

Japanesestockmarket.

ThispaperexaminestheimpactoftheyenonJapanesestocksoverthreedecadesfrom1980to2010.In

particular,it

analyzes

the

heterogeneity

in

the

yen

sensitivity

of

Japanese

firms,

and

also

the

variation

in

thissensitivityoverthisthirtyyearperiod.Thepossibilityofanasymmetryinthestockpriceresponseto

arisingorfallingyenisalsoconsidered.Inaddition,thispaperstudiesthehistoricaldispersionofyen

sensitivityunderdifferentconditions.Thecontributionofyensensitivitytoastocksoverallvolatilityis

alsoexamined.Lastly,historicallystockscreensbasedonyensensitivityarecomparedtothe

performanceofothercommonstockscreensusedbyinvestors.

TheAppreciationoftheYenHistoricallyTheyenisoneoftheworldsmostheavilytradedandwidelywatchedcurrenciestoday.1 Overthelast

thirtyyears,ithasalsobeenveryvolatile,asseeninExhibit1below.

Exhibit1:

The

Yen

During

the

Last

Thirty

Years

Source:BankofJapan,BankofInternationalSettlements

1CentralBankSurveyofForeignExchangeandDerivativesMarketActivity,BankofInternationalSettlements.


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monthlyobservationsduringthesampleperiodfrom1980to2010.Thecoefficienttothetrade

weightedyenindexisthereforeameasureoftheyensensitivityofagivenstockduringthatperiod.A

negativevalueimpliesanegativeimpactonstockpricefromastrongeryenandviceversa.Nextwe

considerthedistributionoftheseyensensitivitiesforJapanesestocks,showninExhibit3below.2

Exhibit3:DistributionofYenExposures(19802010)

Theaverageoftheyensensitivityacrossstockswasalmostzeroat0.004,whichisconsistentwiththe

lowcorrelationbetweenthemarketindexandthetradeweightedyenindexshowninExhibit2.Exhibit

3,however,confirmsthattherewassignificantcrosssectionalvariationatthestocklevel,resultingina

muted

response

to

yen

changes

at

the

aggregate

market

level.

Exhibit4indicatessubstantialindustrydifferencesinyensensitivity. Asexpected,mostoftheindustries

withnegativesensitivitytendedtobeexportoriented,suchasfirmsproducingautos,officeandhome

electronics,precisionequipment,electronicparts,computersandtelecomequipment.Attheother

extreme,foodandbeveragecompanies,aswellasutilityfirms,hadpositiveyensensitivity,presumably

duetolowercostsofrawmaterialsfromastrongeryen.Banksalsohadpositiveyensensitivity,which

couldberelatedtotheirholdingforeignexchangepositions.

2Forcomparability,onlystocksthatexistedthroughoutthewholesampleperiodareincluded.Thissamplehasabout1,200stocks.

Normal

Distribution


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Exhibit4:YenSensitivitybyIndustry

(Blackbarsimplystatisticalsignificanceat95%confidencelevel)

HistoricalStabilityofYenExposuresInExhibit5,the30yearsampleperiodisdividedintothree10yearintervals.Withineachperiod,the

yensensitivitiesarecomputedseparatelyfordifferentstocks.Theseestimatesarecomparedatthe

stocklevelacrossadjacenttimeperiodsusingapairedttest.Thenullhypothesishereisthattherewas

nochangeinthestocklevelyensensitivitiesbetweenthefirstandseconddecades,andseparately

betweenthesecondandthird.Forbothcases,thisnullhypothesisofnochangeinyensensitivitywas

stronglyrejected.Thisresultissupportedbyexaminingtheabsolutepercentagechangeintheyen

sensitivitiesshowninExhibit5below.Theabsolutechangesareveryhigh,suggestingthatyensensitivity

washighlyunstableduringthethreedecades.

Exhibit5:StabilityofYenSensitivityAcrossTime

AbsolutepercentchangeinYenSensitivity

(Averageforallstocks)

Between1980sand1990s 937%

Between1990s

and

2000s

551%

Note:Absolutepercentchangeinyensensitivitywascomputedbydividingitsabsolutedifferencebetweentwodecadesbythe absolutevalueof

yensensitivityintheearlierdecade.

YenAppreciationversusDepreciation:AsymmetricEffects?Theinstabilityofyensensitivitiescouldhaveresultedfromasymmetriceffectsofyenappreciationand

depreciation.Tofurtherpursuethislineofthought,wedividedthesampleperiodinto8subperiods,


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correspondingtothedirectionofyenmovement.TheseareillustratedbelowinExhibit6.Thefirst

periodisfromJanuary1980toSeptember1985,whichisjustbeforethePlazaAccordandwasaperiod

ofrelativelymildyenappreciation.Inallotherappreciationperiods,theaveragemonthlyriseintheyen

exceeded1%. Forthethreeperiodsinwhichtheyenfell,theaveragedeclinepermonthrangedfrom

0.3%to 1.3%.Dividingthethirtyyearspanintotheseeightperiodsallowsustoexaminevariationin

yensensitivity

according

to

the

direction

of

yen

movement.

Exhibit6:EightSubperiodsofYenAppreciationandDepreciation

Source:BankofInternationalSettlements(BIS)

Wecomputedtheyensensitivitiesfortherespectivestocksseparatelyforeachoftheeighttime

periods.Wethencomparedtheirvaluesforperiodsofrisingyentoadjacentperiodsinwhichtheyen

weakened.TheaverageyensensitivitiesareshowninExhibit7below.Firstfocusingonthetopsection

thatapplies

to

all

Japanese

equities,

we

see

that

yen

sensitivity

was

not

stable,

even

at

the

stock

level.

Thisisconsistentwiththeinstabilityweobservedearlierwhendividingthesampleintothreedecades.

Theaveragevaluesweregenerallynegativewhentheyenwasstronglyappreciating(3outof4times)

andpositivewhenyenwasdepreciating(3outof3times).Theimplicationisstriking:bothnegativeyen

sensitivityduringtheyenappreciationperiods,aswellaspositiveyensensitivityduringtheyen

depreciationperiods,impliesthatthetypicalstockduringthoseperiodswasadverselyaffectedbyyen

movementsinbothdirections.

Intermsofthechangeinyensensitivityacrossconsecutiveperiods,therewasalsoaconsistent

asymmetry.Movingfromperiodsofrisingyentofallingyenperiodsalwayscausedyensensitivityto

movehigherinthepositivedirection,andviceversa.Inotherwords,therewasatendencyofreversion

towardszerosensitivity.Thisasymmetrymayhavethereforebeenamajorreasonbehindtheperceived

instabilityof

the

yen

sensitivity

over

the

last

thirty

years.

Lookingattheexporterstockswithnegativeyensensitivity(middlesectionofExhibit7),weobserved a

tendencyforzeroreversion.Thesameappliestoimporterstocksthatarerepresentedbythebottom

sectionofExhibit7.Fortheseimportingfirms,wesawthattheadverseeffecttheysufferedduring

periodsofyenweaknesswasgreaterthanthebenefittheyenjoyedduringtimesofyenappreciation.


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Exhibit7:ChangeinYenSensitivitybetweenYenAppreciationandDepreciationPeriods

Source:ComputedfromMSCIdata.

HistoricalDispersioninYenSensitivityWeconsideredthedistributionofyensensitivityfordifferentfirmsearlier,butdidnotexaminethe

possibilityofdispersionacrossfirmschangingoverthelast30years.Again,theentiresampleperiod

from1980to2010isdividedinto8subperiodsaccordingtothedirectionofyenmovement. The

dispersionofyensensitivityacrossstocksduringthisperiodisshowninExhibit8below.

Exhibit8:

Changing

Dispersion

of

Yen

Sensitivity

Across

Time

Note:Dispersioniscomputedfromtakingthestandarddeviationoftheyensensitivityacrossallstocks.

Thedispersioninyensensitivityappearedlargerduringyendepreciationperiodsthanduringyen

appreciationperiods.Onepossiblereasonisthatarisingyentendedtooccurduringtimesofmarket

uncertaintyandriskaversion,whenmoststockswereadverselyaffected.Thisasymmetryalsohas

FromOct85 Nov88

(Yen+1.5%/mth)

Dec88 Apr90

(Yen 1.3%/mth)

May90 Apr95

(Yen+1.4%/mth)

May95 Aug98

(Yen 0.8%/mth)

Sep98 Sep00

(Yen+1.7%/mth)

Oct00 Jul07

(Yen 0.3%/mth)

ToDec88 Apr90

(Yen 1.3%/mth)

May90 Apr95

(Yen+1.4%/mth)

May95 Aug98

(Yen 0.8%/mth)

Sep98 Sep00

(Yen+1.7%/mth)

Oct00 Jul07

(Yen 0.3%/mth)

Aug07 Aug10

(Yen+1.3%/mth)

AllStocksinJapaneseUniverse

Averageyensensitivity(firstperiod) 0.032 0.578 0.264 0.593 0.455 0.345

Averagechangebetweenperiods 0.64 0.30 0.34 1.01 0.79 0.56

Stockswithstatisticallysignificantandnegativeyensensitivity



Stockswithstatisticallysignificantandpositiveyensensitivity



YenChange Yen's

Period PerMonth Direction Dispersion

Jan80 Sep85 0.5% Up 0.48

Oct85 Nov88 1.5% BigUp 0.70

Dec88 Apr90 1.3% Down 1.72

May90 Apr95 1.4% BigUp 0.44

May95 Aug98 0.8% Down 0.90

Sep98 Sep00 1.7% BigUp 0.95

Oct00 Jul07 0.3% Down 0.81

Aug07 Aug10 1.3% BigUp 0.94

AverageDispersion

perabs%yenchange

YenUp 0.70

YenDown 1.14

59.8

157.6

Dispersion/absolute

%yenchange

94.9

46.0

127.5

31.3

AverageDispersion

107.6

56.7

237.6

70.2

Forexporterswith

negativeyen

sensitivity,this

sensitivitytended

toshrinkthe

followingperiod

(i.e.

cross

period

differencesare

positive).

Thetypicalstock

washurtbyyen

movementsin

bothdirections,

becauseaverage

yensensitivitywas

negativewhenthe

yenwasrisingand

negativewhenthe

yenwasfalling.

Similarly,tendencyforzeroreversioninyensensitivityforimporters.Yensensitivitywas

higherwhentheyenwasweakeningthanwhenthe yenwasappreciating,suggestingthat

theadverseimpactthesefirmsexperiencedduringperiodsofyenweaknesswasmorethan

thebenefit

they

enjoyed

during

periods

of

yen

appreciation.


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potentialimplicationsfortheactiveversuspassivedebate,sincetheopportunitysetcouldbelarger

duringperiodsofaweakeningyen,comparedtotimeswhentheyenisstrengthening.

ToWhatExtentDidYenSensitivityContributetoStockVolatility?Here

we

examine

the

relative

degree

that

the

cross

sectional

variation

of

stock

volatility

was

explained

duringtheobservedperiodbyyensensitivity,comparedtootherfactorssuchascompanysize,growth

orvaluebiasandindustry.TheresultsareshownbelowinExhibit9.

Exhibit9:ContributionofYenSensitivitytoStockLevelVariationinStockVolatility

Note:Thistableshowscoefficientestimatesobtainedfromregressingstockvolatilityonthevariousvariablesinthefirstcolumn.

StockvolatilityisbasedonstocklevelexposuresofstockstotheVolatilityfactorintheBarraJPE3Model.

Therearetwoobservationsonecouldmakefromtheresults.Thefirstisthatyensensitivitywasusually

thedominantvariableinexplainingstockvolatility.Thesecondisthatthisdominanceincreasedover

timeacrosstheeightsubperiods.

StockScreensBasedonYenSensitivityInthissection,weinvestigatetwocommonstockscreensbasedonyensensitivityandcomparethemto

othercommonscreensusedbyinvestorsinJapanesestocks.Thefirstofthese,calledtheLongExporters

screen,favorsstocksmosthurtbyyenstrengthagainstthosewhichbenefitthemost.Theobjectiveisto

favorexporterswhiletiltingawayfromimporters.Thesecondscreenistofavorstockswithlowyen

sensitivity,so

that

highly

sensitive

stocks

(whether

on

the

positive

or

negative

side)

are

underweighted;

wecallthissecondapproachtheLowYenExposurescreen.

Thestockscreensbasedonvariouscriteriaarerebalancedmonthlyandareexecutedasfollows:atthe

endofeachmonth,allstocksaresortedaccordingtooneofthecriteriaanddividedintothreeequal

parts;thereturnofthetopthirdminusthereturnofthebottomthird(bothcapweighted)iscomputed

forthefollowingmonthandbecomesthereturnforthestockscreen.Duetomonthlyrebalancing,this

sortingandselectionprocessisconductedonamonthlybasis,andtheperformanceresultsareshownin

Yenchange/month 0.5% 1.5% 1.3% 1.4% 0.8% 1.7% 0.3% 1.3%

Jan80 Oct85 Dec88 May90 May95 Sep98 Oct00 Aug07

Sep85 Nov88 Apr90 Apr95 Aug98 Sep00 Jul07 Aug10

YenSensitivity(Abs) 0.19 0.25 0.22 0.20 0.39 0.33 0.34 0.35

StyleFactors

Size0.05 0.18 0.20

0.05

0.16

0.09

0.07

0.09

Value 0.22 0.24 0.13 0.35 0.23 0.22 0.24 0.17

Growth 0.06 0.03 0.01 0.03 0.03 0.08 0.02 0.23

IndustryFactors

AverageAbsValue 0.08 0.05 0.04 0.04 0.04 0.05 0.06 0.05

MaxAbsValue 0.35 0.17 0.12 0.25 0.16 0.19 0.15 0.15

MinAbsVal ue 0.0010 0.0009 0.0011 0.0025 0.0000 0.0002 0.0013 0.0031

Yensensitivitywasoftenthedominantfactorexplainingstock

volatilityanditalsogenerallyincreasedovertime


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Exhibit10below.Inadditiontothesetwoscreens,otherscommonlyusedbyinvestorsarealsoincluded

forcomparison.

Exhibit10:ComparingVariousStockScreens

(19852010,withMonthlyRebalancing)

Annualized Annualized Sharpe

Return Volatility Ratio

Value(B/P) 11.8% 16.7% 0.71

Value(E/P) 9.8% 14.0% 0.70

LongExporters 3.7% 13.1% 0.28

LowVolatility 3.1% 19.9% 0.15

SmallCaps 2.4% 17.1% 0.14

LowYenExposure 0.5% 8.9% 0.05

Momentum3.4%

21.6%

0.16

Note:Thetableincludesbooktoprice(ValueB/P),earningstoprice(ValueE/P),exchangerateexposure(LongExporters),

absoluteexchangerateexposure(LowYenExposurescreen),marketcapitalization(smallcaps),standarddeviationofdaily

returnsoverpreceding65days(LowVolatility),andcumulativestockreturnsoverlast12months(Momentum).Allofthesedata

aredrawnfromthecorrespondingdescriptorexposurewithintheBarraJapanEquityModel(JPE3).

Ofthetwoscreensbasedonexchangerateexposure,theLongExportersscreenperformedbetterover

thebacktestedperiod.Inparticular,itcomparedfavorablywithallotherscreens,exceptforthetwo

valuescreens.TheoneonLowYenExposure,however,didnotperformaswell,andgeneratedaloss

overthesamebacktestperiod.

Wealso

compared

the

correlation

of

these

two

screens

with

the

others

available,

and

the

correlation

matrixoftherespectivescreensisshowninExhibit11below.ThecorrelationsthattheLowYen

Exposurescreenshareswiththeothersarehighlightedingray,andthesevaluesaregenerallyverylow,

exceptforthecorrelationwiththelowvolatilityscreen,whichis0.5. Aswasfoundinthepreceding

section,stockswithloweryensensitivitytendedtobelessvolatile;itisnotsurprisingthatthesetwo

screensweremorehighlycorrelated.AsfortheLongExportersscreen,thecorrelationswerehighlighted

inblack.Thesecorrelationswerewellbelow0.5andthereforethisscreenhadgenerallylowcorrelations

withtheothers.

Exhibit11:CorrelationMatrixofVariousStockScreens

B/P E/P Low

Small

LowYen

Value Value Exporters Volatility Caps Exposure Momentum

Value(B/P) 1

Value(E/P) 0.44 1

LongExporters 0.21 0.24 1

LowVolatility 0. 11 0. 35 0.35 1

SmallCaps 0.60 0.18 0.12 0.18 1

LowYenExposure 0.03 0.07 0.13 0.50 0.07 1

Momentum 0.63 0.34 0.16 0.24 0.33 0.09 1


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ConclusionTheyenisacloselymonitoredeconomicvariablefortheJapaneseeconomy.Thispaperanalyzedthe

yensimpactontheJapanesestockmarketduringthelastthreedecades,andexaminedhowsensitivity

totheYenvariedacrossJapanesefirmsandovertime.Wefoundthatyensensitivitymaynothavebeen

evidentattheaggregatemarketlevel,becauseofsubstantialindustrydifferences,whereexportershad

highnegative

values

and

importers

had

positive

values.

The

variation

over

time

was

also

substantial;

generally,Japanesestocksweevaluatedwerenegativelyaffectedbyyenmovementsinbothdirections.

Thedispersionofyensensitivityacrossstocksalsoappearedtochangeovertime,andfellwhentheyen

strengthenedandrose whentheyendeclined.Theextentofsensitivitytotheyenalsocontributed

significantlytoastocksvolatility,ascomparedtostyleandindustryfactors,andtheextentofthis

contributionalsoincreasedovertheobservedperiod.Lastly,thispaperalsoconsideredstockscreens

basedonyensensitivityandfoundbetterperformanceduringtheobservedperiodbyascreenthat

leanedtowardsexporters.

ReferencesHashi,YukoandTakatoshiIto(2009).EffectsofJapaneseMacroeconomicAnnouncementsonthe

Dollar/YenExchangeRate:HighResolutionPicture,NBERWorkingPaperNo.w15020.

YenHeadingtoNewHighasNoInterventioninSightWithFedRatesonHold,BloombergNews(Jun

21.2011).


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impact of yen on japanese stocks (jul 2011)

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