Japanese Yen under pressure
The Japanese government has been pushing for a weak yen for a long time. A weak currency led to higher profits for Japanese exporters and to more import inflation, which is handy if you are trying to get inflation up. At the same time, the Japanese are very rich, but they do not get a return on their savings in the country itself. The Japanese, therefore, lend out the money in other currencies and, in order to boost the result a bit more, they are also happy to lend out some more in yen.
In Japan, it is the woman who is in charge of the family’s financial affairs, and thus the proverbial Mrs Watanabe, stereotypical of one of the world’s leading currency traders, was born. Whenever there was stress in the financial system, Mrs Watanabe’s positions were scaled back, which automatically caused a demand for yen. The result was that, like the dollar and the Swiss franc, the Japanese yen acted as a safe haven, something that can also play an important role in an investment portfolio.
This year the yen is weakening, despite the war in Ukraine. One of the reasons is the sharp rise in commodity prices. These are traded in dollars or possibly in renminbi, but not in yen (apart from Azuki Red Beans). As a result, Japan’s trade balance is deteriorating and with it the yen. Another reason is that the Fed and other central banks will raise interest rates. It is also widely expected that the ECB will raise interest rates, while markets expect the Bank of Japan to do nothing. For Ms Watanabe, wider interest rate differentials also mean that it has become more interesting to borrow in yen and to sell in dollars.
The result is that we now have an undervalued stock market and an undervalued currency, an attractive combination in itself. But markets can remain undervalued for a long time. What matters is that there will be fundamental changes that will lead to a greater appreciation of Japanese equities and/or the Japanese currency. Incidentally, the sensitivity of Japanese business to the yen is not too bad; much production has been outsourced to parts of Asia and is now located in countries such as Vietnam and Thailand.
Japan does not compete with other countries in Asia with its products, not even with the United States. Japan’s main competitor is Europe and particularly Germany. Toyota’s competitor is Volkswagen and not, for example, GM. The higher segment of Toyota is Lexus and which is mainly set up as a competitor of Mercedes. Also in the field of capital goods (robots), pharmaceuticals, recycling and alternative energy, the competitors of Japanese business are mainly in Europe. Now that the whole world is experiencing supply problems, especially in long chains, Japanese business suddenly has an extra competitive advantage in Asia. That Volkswagen or Mercedes cannot be delivered in China for a while, but the Toyota or the Lexus can. With the current weak yen, it is now time for Japanese businesses to take market share away from Europe. Moreover, China would probably rather cooperate with Japan than with, say, Germany. If sanctions are imposed on China, that country will have more control over nearby Japan than over distant Germany.
Although factors such as the trade balance and monetary policy do not favour the yen, the currency is already firmly undervalued and many Mrs Watanabes are now short yen. This combination ensures that Japan can continue to play its role as a safe haven in the future, even in the face of global financial stress.
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