When the Japanese central bank stuck to its expansive monetary policy last week, regardless of the devaluation of the yen, investors on the Tokyo stock exchange rewarded this with a plus of 1.8 percent in the Nikkei index.

If the US Federal Reserve tightens its monetary policy this Wednesday with a likely 0.5 percentage point hike in interest rates, Japanese investors will not be able to react.

Trading on the Tokyo stock exchange only resumed on Friday after a series of public holidays.

Patrick Welter

Correspondent for business and politics in Japan based in Tokyo.

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The dominant topic in Tokyo is not the war in Ukraine.

Japan, in line with the West, has imposed bold sanctions on Russia.

But the stock market doesn't really do that.

Naoki Kamiyama, chief equity strategist at Nikko Asset Management, said the number of large companies that produce and sell in Russia is very limited, with a few exceptions such as some car manufacturers.

Doubts about the positive effect of the devaluation

Rather, the dominant theme is monetary policy and the rapid devaluation of the Japanese currency.

According to most analysts, the yen's slide was driven by the monetary policy discrepancy between Japan and western countries.

A 10-year interest rate of nearly 3 percent in the United States compares to less than 0.25 percent in Tokyo.

That drives capital to America.

Since March 10, the yen has lost around 12 percent against the dollar.

Investors initially reacted positively to the devaluation of the yen.

By the end of March, the Nikkei Index was up about 10 percent.

This supports the central bank's argument that the devaluation is positive for Japan's economy.

Since then, however, the stock index has slipped and given back about half of the gains.

This reflects the growing awareness in Japan that imported inflation not only makes it more difficult for companies to do business, but also weighs on private consumption.

The post-Omicron economic recovery and the outlook for domestically-focused consumer stocks hinge on pent-up consumption unraveling during the pandemic.

The consumer confidence index, which was little higher in April than before, suggests that the time has come.

How much does the devaluation of the Tokyo stock market help?

In an international comparison, not much so far.

The yen's depreciation against the dollar began in full swing on March 10, as the United States reported inflation at a 40-year high.

In the weeks since then, the Nikkei index has gained 4.5 percent and is in line with the gains of the Dax (about 4.1 percent) and the British FTSE (about 5.8 percent).

The euro and pound sterling lost only about half as much as the yen against the dollar.

The last major depreciation of the yen in Japan was from 2013 to the summer of 2015, when Kuroda drastically expanded quantitative easing after taking office.

At that time, the yen depreciated by around 35 percent within 27 months.

The Nikkei index, on the other hand, rose by 82 percent.

Is there a similar development coming up this time?

Some analysts see the devaluation of the yen as a negative signal because it shows the weakness of the Japanese economy in an international comparison.

That would speak against a bull market in Tokyo.

Observers such as Monex's Jesper Koll, on the other hand, point out that Japanese stocks, with a price-earnings ratio of around 13, are already cheap not only in the historical average of the past 30 years, but also compared to American stocks.

Koll does not rule out that the yen will slip to 150 to 160 yen per dollar with the decoupling of Japanese monetary policy from international ones.

But one of the big differences between the current yen depreciation and 2013 is that institutional investors have yet to seize the opportunity to shift assets to Japan.

Back then, Japan's accommodative monetary policy was helped by the national pension fund's large-scale reallocation of its assets not only from domestic to foreign, but also from domestic bonds to domestic equities.

As a package, this drove the devaluation of the yen and, indirectly and directly, Japanese stock prices higher.

Unlike then, the Bank of Japan stopped buying tradable equity funds (ETF) months ago.

The stock market has less support than in 2013. The special "Kuroda put" is missing this time.

Nevertheless, Koll paints a scenario that sees Japanese stocks in positive territory.

Around the time of the Federal Reserve's third interest rate hike, American stocks were no longer attractive as a risky investment.

Then, according to his forecast, comes the opportunity for Japanese stocks.

If Japan's institutional investors like the pension fund then switched to Japan from overseas, Tokyo stock prices could rise in tandem with yen appreciation.