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Good morning. Warren Buffett announced yesterday that he is “going quiet”. He leaves us with these words (among others): “Lady Luck is fickle and — no other term fits — wildly unfair. In many cases, our leaders and the rich have received far more than their share of luck — which, too often, the recipients prefer not to acknowledge.” The Unhedged team feels very lucky to do the work we do, even if we are neither leaders nor (by finance standards) particularly rich. Enumerate your blessings in an email: unhedged@ft.com
Strong stocks and a weak yen
The Nikkei 225 has had a good run since it became clear Sanae Takaichi would become Japan’s next prime minister. It’s up 11 per cent since Takaichi’s victory in Liberal Democratic party elections at the beginning of October. Dollar-based investors did not capture all of that, though. The yen has continued to weaken against the dollar:
Unusually, the yen’s decline has come even as US yields — normally the dominant driver of the dollar-yen exchange rate — have ticked down. Chart courtesy of Jonas Goltermann at Capital Economics:
This time around, the critical driver of the yen’s weakness has been not rates but expectations for “Sanaenomics”, which follows Abenomics’ enthusiasm for loose fiscal and monetary policy. As Unhedged noted last month, this combination makes a weaker yen all but inevitable. Policy changes are already under way — Takaichi told lawmakers on Friday that she would drop Japan’s annual budget-balancing goal in favour of “a slightly longer-term view”.
At the yen’s current level of about 154 to the dollar, the chances of Bank of Japan intervention are low, according to Francesco Pesole of ING. Should the yen approach 160, however, it will become more likely. For now, even a smaller move down could trigger “verbal interventions, where . . . the louder Japanese authorities start saying that they’re monitoring the market very closely”, says Pesole.
Japan has also received unsolicited currency intervention from US Treasury secretary Scott Bessent, who has positioned himself as an advocate for central bank independence and “sound monetary policy” in Japan (Japan’s minister of finance’s responded: “I don’t think he intended to prod.”). This is unsurprising when considering Bessent’s desire for the dollar to weaken against the currencies of the US’s trading partners.
But Bessent isn’t entirely off the mark in calling out the BoJ for its slow response to inflation. Deutsche Bank’s Tim Baker points out that the BoJ still has much more room to raise rates. “Despite a cumulative inflation overshoot amounting to 30-50 per cent [relative to target], it’s hiked only 15 per cent as much. If the BoJ followed the G10 trend, the policy rate would be ~2 per cent already”, rather than the current 0.5 per cent level, he noted. Chart from Deutsche:
Takaichi stands at odds with the BoJ, which is trying to normalise monetary policy and tame inflation. While her government can’t directly influence the central bank’s decision making, the minister of finance sits in at BoJ meetings and can raise requests. It is doubtful the BoJ “would be willing to risk the wrath of newly anointed PM Takaichi, whose stated preference is for a continued dovish monetary policy stance”, said Goltermann at Capital Economics.
Another possible contributor to yen weakness: a tentative return of the carry trade. Pesole believes the US government shutdown may have played a role:
No data being published [is] actually helping the dollar — in the sense that it’s preventing markets from finding a very good catalyst to re-enter dollar shorts, but also because it’s capping FX volatility. And when FX volatility is capped, carry trades become more popular, and the best way to fund them is the yen.
In the short run, a weaker yen may help some Japanese companies (though many exporters have long since globalised their production base). In the longer term, though, we wonder how long a rising stock market and a falling yen can coexist. Japanese households have been feeling the pain from currency-driven inflation and have been net sellers of Japanese equities since 2023. Foreign investors, meanwhile, may not want to keep investing against the headwind of a persistently weakening currency. Takaichi will have to strike a careful balance.
Memory stocks
Judging by the headlines, 2025 has been the year of the “AI hyperscaler” in stock markets. And in one sense this is true: Alphabet, Nvidia, Microsoft, Amazon and Meta have together added $3.3tn in market value this year, almost half of the growth in value of the S&P 500.
But in percentage rather than dollar terms, another group of S&P stocks — also linked to AI — has massively outperformed the hyperscalers. The memory companies Western Digital, Seagate and Micron are the first-, third- and fourth-best performers in the S&P 500 this year, respectively (outside of the S&P, SanDisk and SK Hynix have stormed higher, too).
At a very high level, the story is straightforward: AI has created demand for computing power of all sorts, not just specialist GPU-driven computing powered by Nvidia chips. Computing requires memory. And as AI content creation explodes, that content needs to be stored. Add in limited manufacturing capacity for many memory products, and you have the ingredients for a boom.
Memory is also a famously cyclical business. Here is the roller-coaster of revenue growth at the three companies over the past 10 years. Notice that it looks like we might have passed the peak in the most recent revenue cycle:
Looking at a stock chart over the same period, however, it looks like the memory stocks might be pricing in a new era or supercycle for the industry:
We’d be keen to hear from readers who know more about this industry than we do.
One good read
AI in the desert.
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