"Exporters' profits will take a hit on the yen," said Yoshio Inamura, manager at Tokyo-Mitsubishi Asset Management. "Still, investors have been insulating their portfolios against that kind of currency risk for some time, so I don't think we'll see a huge sell-off."
Sony and Honda set the pace for retreating shares last week as the Japanese currency reached its highest level since September 1995, and a level well above the rate at which both companies have based their profit forecasts.
Last week, the Nikkei 225 average lost 450.36 points, or 3.3 per cent, to 13,391.81 - its worst five-day run in 10 weeks. Sony's shares have lost a quarter of their value, and Honda's shares have dropped more than 10 per cent since October, when the yen began its ascent with its biggest jump against the dollar in 25 years. Both companies rely on US sales for a third of their revenues.
Financial shares may slip if bond prices extend recent declines - a trend that threatens to erase the value of banks' investment portfolios.
Banks' profits on bond trading and gains on maturing bonds will completely disappear if the benchmark yield remains above 1.7 per cent during the second half of the tax year, estimates James Fiorillo, an analyst at ING Baring Securities. Bond-related earnings accounted for 28 per cent of the operating profits of the country's 18 largest institutions during the half-year ended in September.
Government bonds, though, are likely to be little changed this week as investors see whether a series of auctions this month will flood the market with new supply and outrun demand. "The focus will remain on next week's six-year bond auction, and the key will be on investor appetite for new supply," said Naomi Hasegawa, a senior economist at Tokyo-Mitsubishi Securities. Since 30 December, the benchmark 10-year bond yield has fallen 34 basis points to 1.670 per cent.
On Tuesday, the Ministry of Finance is expected to sell around 900 billion yen in six-year bonds, and during the following two weeks, will hold 20- year and 10-year auctions.
Nikkei Copyright: IOS & Bloomberg