After the devastation wrought by what is now officially known as the ‘Great Tohoku Kanto Earthquake’, Japan’s currency rose in value. It’s the last thing Japan’s under-pressure economy needs – the high yen has been a serious bugbear for Japanese multi-nationals for some time. It seems a little counter-intuitive for the currency to be rising in value at this time, given the hit the Japanese economy will be taking. Share prices on the Tokyo Stock Exchange duly tumbled, so what’s going on with the currency, asks Dave Leggett.
There are signs that it has now been checked, but the yen has been on something of a post-‘quake march. Or rather, traders buying it have been. Earlier this week it hit a record high 76.25 against the dollar. Japanese car companies are said to get extremely twitchy if the yen-dollar rate goes under 82.
Indeed, the big Japan-based OEMs and suppliers have been citing the high yen as a drag on profitability for some time. It makes Japanese-built cars and component parts expensive in overseas markets’ local currencies. Repatriated profits also yield fewer yen. Overseas subsidiaries’ margins are hit and long-term sales growth strategies can be negatively impacted by the persistence of too high a price point. Daihatsu – a specialist in relatively low-margin small cars – recently announced that it is bowing out of Europe because of the strong yen. However competent and clever you are with managing your business, it can all be thrown out of the window by an exchange rate headwind that is just too strong.
But why the sudden yen rise this week in the aftermath of a severe natural disaster? The main reason for the rise of the yen in recent days seems to lie in the Japanese economy’s high degree of internationalisation and the actual (or supposed) response to the crisis. The thinking goes like this. Japan has plenty of overseas investments, denominated in foreign currencies. As Japanese households, companies, the government and financial institutions respond to the current crisis, the repatriation of funds held overseas in foreign currencies means buying yen. Insurance companies, for example, are expected by some to be making a particularly big call in this international flow. In addition, flows in the opposite direction – investments made by Japanese companies and institutions overseas – will likely have dried up suddenly, domestic calls on funds taking priority. The stage is therefore set. As demand for the yen quickly rises, the price goes up.
That’s the theory. And, of course, speculators are attracted to something like that, adding further to upward pressure on the currency. They also know that Japan’s government is not in a position to ask the Bank of Japan to swiftly cut interest rates (they are at zero), so its response to currency appreciation may take a little time to determine.
Meanwhile, as we have seen, the stock market moves in the opposite direction, the appreciating yen suggesting a further deterioration in prospects for companies that are major exporters from Japan. Investor sentiment in equity markets turns sharply negative.
There is some historical precedent for this crisis-related currency appreciation. After the Kobe earthquake in 1995, the yen surged to a record high against the dollar. Japan’s net foreign assets are much higher now than they were back then, lending weight to the idea that the repatriation flows could be even bigger this time around.
Whether fund repatriation flows are behind recent yen appreciation or whether it is primarily the work of currency speculators, the recent rise of the yen has been spectacular. It appreciated around 7% since March 10 versus the dollar to a record high 77.25. Just under a year ago it was in the 90-95 range.
However, this morning (March 18) there is news of relief on the yen. It has fallen back on news that the G7 industrialised nations are prepared to intervene in a coordinated manner to prevent ‘volatility’ in currency markets (which is related to volatility on equity markets). Finance ministers and central banks are clearly craving some stability after the tumultuous events of recent weeks – not just in Japan but in Libya and the oil price, too – that have dented confidence globally.
The emphasis on promoting stability and a collective will to act is very welcome news for the Japanese government. It will send a powerful message to markets. The experts say it is much more significant than the Bank of Japan intervening alone. The speculators banking on yen appreciation are apparently in retreat. At the time of writing the yen has depreciated to a little over 81 to the dollar.
As the Japanese government contemplates the next steps in the immediate crisis and managing an economy under severe pressure, it’s a welcome development for the recent appreciation of the yen to have been checked, for now. Will yen depreciation continue? Many in Japan’s auto industry and government will be hoping that it does.