The Japanese yen is rapidly losing its value against the dollar, increasing pressure on the Japanese economy as well as the yen’s status as a safe haven. We investigated the Japanese enigma.
For the first time in twenty years, a dollar is worth 130 yen. Some currency specialists believe that in the short term 135 yen will have to be paid for a dollar. Mazen Issa, currency strategist at TD Securities, even sees an upward trend to 150.
The decline in the Japanese currency is driven by the different interest rate levels in the US and Japan. Consumer price inflation was 1.7 percent last month. Although high for Japan, it does not compare with inflation in Europe or the US. The currency’s decline is compounded by the very popular carry trades, borrowing from one currency with a low interest rate, and then converting the borrowed amount into another currency with a higher interest rate.
BoJ remains calm
The Bank of Japan’s (BoJ) view is that the level of inflation gives little reason to tighten its loose monetary policy, despite the sharp fall in the currency. The fact that the global rise in energy prices also seems to be generating a slight increase in overall inflation in Japan does not change this.
Japan’s public debt, at 260 percent of GDP, is the highest among developed countries. Rising interest rates could undermine the sustainability of that debt.
Japan has 1400 billion dollars in foreign currency reserves to support its own currency. Only China holds more.
Monetary experiments
Han Dieperink, chief investment strategist at Auréus Vermogensbeheer, calls currency the ultimate outlet for monetary experimentation. Due to the similar monetary policy, currency pairs kept each other in balance for years during the race to the bottom. Now that the Fed is going to aggressively fight inflation, other currencies, like the yen, are under pressure, he said.
“This is how stability ultimately creates instability. When currencies are stable for a long time, there is less need to hedge currency risks. Then, when a currency starts to move, the need for Treasurers to hedge increases rapidly and reinforces the movement.”
The increasing volatility in currencies is also a reason for more discussion about a new monetary standard. Dieperink said he believes that Russians, but also Arabs and Chinese, have less confidence in Western currencies as a result of the sanctions. The confidence in many currencies is also seriously undermined by rising inflation. Possible alternatives are gold, crypto-currencies or the (digital) renminbi.
Opportunities for investors
Nevertheless, there are opportunities in the Japanese market for the discerning investor. “Japan is a market par excellence where an active strategy can pay off. The whole market has lagged behind other developed markets, but the ‘reopening’ of the Japanese economy is not yet sufficiently reflected in share prices,” said Lodewijk van der Kroft, of fund manager Comgest.
He noted that it is mainly cyclical companies that have been calling the shots since mid-2021; growth sectors such as IT and pharmaceuticals are clearly lagging behind.
The MSCI Japan fell by 4 percent this year, when measured in Japanese yen. “The difference in performance between value and growth companies is clearly reflected in the Japanese style indices. The MSCI Japan Value index stands YTD at +6.93 percent. The growth index stands at a loss of -14.28 percent,” said Van der Kroft.
Dieperink: “’A weaker currency can have positive effects for Japan, namely more import inflation and a better export position. Because of the large number of exporters on the Japanese stock exchange, Japan can also benefit from the decline.”
As exporters on the world market, Japanese companies have a competitive advantage due to the weaker currency, “precisely at a time when their competitors are suffering from supply problems,” he said.
In many ways, the Japanese are competing with the Germans on a global scale. In the context of possible Western sanctions, China now prefers to do business with Japan rather than Germany. “For Japan, this is the moment to gain market share,” said Dieperink.
World not on verge of collapse
According to currency specialist Erna Erkens, however, “we should not be alarmed by developments on the currency market, where 6,000 billion dollars change hands every day”. Doomsday scenarios about a “tipping point” in the global economy are far-fetched, she said.
“Analysts who panic about this have a rather short horizon. If we look at the historical course of the dollar/yen exchange rate, we see a rate of 357 in 1972. In 1998 it was at 144. In 2012 it was 76, and now it is indeed hovering around 130 again.”
Erkens noted that technical analysts only look at the next price targets and often ignore the fundamental analysis. “The Japanese central bank has even said that, despite negative interest rates, they are willing to ease further if necessary. This attitude is totally contrary to that of other central banks. Because the rise is out of the stock market, people are now looking for other, short-term, trades. The carry trades mentioned are a good example, but the world is not on the verge of collapse.”
This article originally appeared in Dutch on InvestmentOfficer.nl.
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