The Japanese yen has been rising steadily against the dollar for a quarter of a century now. The trend started in 1985 when Japan agreed, in an international accord signed at New York’s Plaza Hotel, to intervene in currency markets to arrest what seemed at the time as an excessive U.S. trade deficit aggravated by the strength of the dollar.
While most economic commentators portray the strong yen as a fundamental problem for Japan, portfolio manager Drew Edwards of Advisory Research (ARI) Funds says the Japanese have proven themselves adept at adjusting to a stronger currency. The yen has appreciated over 50% against the dollar in just the past five years.
In an interview with AdvisorOne, Edwards said it is true that Japan is a global exporter and as such can be adversely impacted by a strong yen. But that’s not the whole story. “Seventy percent of Japanese GDP is based on domestic consumption,” he says. “Domestic consumers benefit from this.”
Another key beneficiary of a strong yen is investors, Edwards (left) adds. “Most of the companies we invest in are usually net cash. They have strong balance sheets with a lot of cash. What they’re doing with it increasingly is invest outside of Japan. The yen is so strong that they’re able to buy foreign assets at a great discount.”
The result, he says, is a significant pick-up in corporate M&A. When his Advisory Research team visits companies, “We ask what they’ll spend their cash on; that’s what they say.”
Edwards emphasizes that his team members are bottom-up investors, so they’re not focusing their search specifically on companies that are takeover targets. “We’re buying companies that are asset rich, trading at a discount to net asset value.” But he says it is precisely those stocks that are cheap relative to NAV and out of favor that are often attractive as acquisitions.