The Japanese yen is sooooo weak today that charts don't do it justice. You'll struggle to find data that capture the magnitude of its decline against the U.S. dollar, which has taken it to its lowest point since the Berlin Wall was dismantled.
The World Wide Web wasn't even a concept back in July 1990 - Tim Berners-Lee published his public treatise on that idea in November. Nelson Mandela had been released from prison that February. Oh and Saddam Hussein was in August set to invade Kuwait.
The Japanese yen is trading today as high as US$1 to ¥147.79, blowing past the bubble-era blowout in the late 1990s. It is not record weakness because the yen changed hands at crazy levels well above ¥300 to the greenback in the mid-1970s, changing hands at ¥357 in 1971.
But the yen is at a 32-year low. New Kids on the Block were topping the charts with Step by Step, and Sinead O'Connor was shedding a tear in the video for the Prince-penned song Nothing Compares 2 U. Vanilla Ice hadn't quite unleashed Ice Ice Baby on the world. Nirvana, a little better received by critics, were still an underground Seattle grunge band.
It was kinda the last time I might have been on top of those kinds of trends - I started college in Chapel Hill the next month. Actually, I was kinda on top of it - for The Daily Tar Heel, I was an arts & entertainment editor, music and movie critic before launching into three decades of business journalism.
I've had to dig that research up, of course, because I don't remember the yen being this low. In my mind, it's "a little above ¥100," maybe ¥108, ¥110. This is rarified air.
What does it mean?
Well, on a practical level, it's a good time to take dollars to Japan. We're well into fall in East Asia, pretty hot still here in Hong Kong but we're seeing the first snows high on the peaks in northern Hokkaido. Japan on Tuesday opened up to visa-on-arrival self-arranged trips, so this will be the first ski season in three years where domestic Japanese skiers and boarders don't have the slopes to themselves.
Although Japan was relatively slow in its early response to Covid-19, the country started restrictions on foreign arrivals in February 2020, at first from parts of China, its main source of tourists. Visitors from the United States and a whole host of nations were barred from entry that April.
Property buyers have been looking for distressed deals among the many foreign-developed, foreign-owned condos in places like Niseko. The yields on these properties are diabolical, and they're typically all-cash deals since international buyers can't get mortgages. So you're lucky to cover your high running costs (underfloor heating and rooftop snow clearing don't come cheap) and generate a little income in a good year. To miss out on revenue from the 2020-21 and 2021-22 ski seasons entirely, with even domestic travelers unable to move around for large chunks of that time, has been punishing.
It's a bad time to be translating yen into dollars. So foreign buyers into the Japanese stock market will be well-warned to buy currency-hedged vehicles so that their entire return isn't eaten up simply by translating the profits back home.
Compare the performance of the WisdomTree Japan Hedged Equity Fund (DXJ) , which I have recommended in the past and which is remarkably up 1.5% so far in 2022, with the unhedged iShares MSCI Japan ETF, which is down 26.5%.
Japanese equities have been a solid defensive play in the bloodbath that has been the markets in 2022. The Bank of Japan (like the People's Bank of China across the East China Sea) is still in highly accommodative mode. Inflation in the form of the Consumer Price Index has risen since Japan imports all its oil, but is very manageable at 3.0% as of August. Inflation in China, we hear from numbers released today, stands at 2.8%.
The weak yen makes all imports more expensive. Japan's Producer Price Index came in at 9.7% for September, the Bank of Japan said on Thursday, the second-highest increase on record. So companies that are importing ingredients or components must make the tough decision as to whether to eat higher costs with slimmer margins, or pass the costs on to consumers long used to prices staying the same, or deflating.
But while many Japanese multinationals are major exporters, Japan has a large enough domestic economy to sustain itself in most industries. Its top imports are crude petroleum and natural gas, followed by electronic circuits, broadcast equipment and computers. But many of those components come from China, Japan's top source of incoming shipments by some stretch. The US$151 billion arriving from China isn't affected by the blown-out USD:JPY exchange rate. Yes, the US$61 billion from the United States is driven to crazy levels, but expect Japanese importers to shift supply if they can to China and other major trading partners such as Australia, South Korea and Taiwan.
The sudden jump in the yen yesterday and today was prompted not by anything in Japan but by the U.S. inflation report. The Consumer Price Index came in at 8.2% for September, a notch higher than expected but a notch lower than the 8.3% the month before. While hardly a shocker, it reinforced the U.S. Federal Reserve's "higher for longer" course on U.S. rates.
That is negative for the yen but also the world's other currencies. Nations with large borrowings in U.S. dollars, and particularly corporations with large amounts of U.S. dollar debt, are in a world of pain, the kind of situation that precipitated the 1997-98 Asian Financial Crisis. The yen has blown past the levels of the "AFC."
The received wisdom is that weak exchange rates are a boon to Japan's exporters. Cars, car parts and heavy machinery, as well as electronic circuits and photographic equipment, top the charts there. Since Japan exports almost twice the value of goods to the United States as it ships in - US$112 billion in U.S. exports vs. that US$61 billion in imports - the trade is a net positive for the Japanese economy.
This explains why Japan's central bank is very unconvincing on its efforts to talk up strength in the yen. They're not that worried about it. And there's not that much they can do, anyway.
They're right to be concerned, though, about sudden moves. It is disruptive even for exporters that benefit from a weak yen if the value of their products changes between the time they ship them and the time they arrive. Mostly, the BOJ and the government call out speculators and save their starkest criticism for sudden currency moves.
"We can't tolerate excessive moves triggered by speculation," Finance Minister Shunichi Suzuki said in Washington, where he is attending a meeting of G20 finance ministers and central-bank governors. "We're watching the foreign exchange markets with a high sense of urgency, and we'll take appropriate responses against excessive moves."
A "high" sense of urgency is a step from the "sense of urgency" that Japanese officials were initially expressing. There's no doubt that the yen is a concern. But it's clear that the BOJ, Japanese finance ministry and prime minister's office aren't very clear on what they can do about it other than watch, and express concern.
Japan did intervene into the currency market on September 22, for the first time since 1998. Japan sold U.S. dollars from the foreign-currency reserves, and bought the yen to shore it up. It has the cash to do it, with forex reserves that at US$1.2 trillion are second-highest in the world, behind only the US$3.0 trillion of China. But such efforts are expensive and short-lived. They don't work very well, other than to catch out speculators for a day or two.
Those reserves wouldn't last very long. Japan's central bankers and finance-ministry officials therefore prefer "verbal intervention," which costs a lot less but also doesn't really work if no one really believes you.
At the same meeting in Washington, central Bank of Japan Governor Haruhiko Kuroda made it clear he has no intention of raising Japanese interest rates from at or below zero. The policy rate still stands at -0.10% as of August.
Kuroda's run lasts until he steps down in April 2023, so we'll have a super-accommodative monetary policy, record-low interest rates and an extremely weak currency until we see the last of the snows from this winter season.
