TOKYO -- "Sell in May and go away." With many investors bracing for a seasonal drop in stock prices, the yen has continued to slide since the start of the month, briefly crossing the 124 range against the dollar.
The yen's plunge has made it more difficult for the Bank of Japan to ease its monetary policy. If the bank implements additional easing as the yen remains at the current level, it may lower the value of the yen to 130 level against the dollar. If that happens, the bank could draw criticism that it has guided its own currency lower, especially after a senior International Monetary Fund official said that China's currency is no longer undervalued.
BOJ Gov. Haruhiko Kuroda repeatedly said that the bank "will make necessary adjustments without hesitation." The problem now is whether the central bank can ease its monetary policy further without hesitation when the yen should weaken faster than expected and start to dent business sentiment.
Many market watchers predicted that the BOJ's additional easing will boost Japanese stocks further in the second half of the year. For Japanese stocks to move upward even without the BOJ's additional easing, corporate Japan's ability to improve earnings and return on equity will be put to the test.
That said, a weaker yen has helped raise expectations for the rise in Japanese stocks in Western markets. Some market insiders in Japan said the impact of a weaker yen on Japanese stocks will diminish over the medium term, though the prevailing view in Western markets is that a weaker yen is a plus for Japanese stocks. Hedge funds and other institutional investors could again embark on Japanese stock buying and yen selling, like they did last year.
Itsuo Toshima is an independent investment adviser based in Tokyo and a former Japan representative of the World Gold Council.