Investors into Asia will need to factor currency instability into the equation once again, with interest rate differentials driving the Japanese yen through ¥120 to the U.S. dollar for the first time in six years.
The yen's rise helped drive the Topix broad index of the Tokyo market up 2.3% on Wednesday, to its highest close in two months. The Nikkei 225 large-cap index, with a greater influence from multinationals, climbed 3.0%, its highest close since Jan. 18.
If you haven't hedged Japanese exposure into U.S. dollars, you've lost almost 20% on the currency exchange since early 2021. But for export-focused Japanese manufacturers, the weak currency is good news, making their goods cheaper and more competitive overseas.
The yen has weakened 5.3% since March 7, a particularly sharp decline that steepens a longer-term trend. The yen broke above ¥110 in September and has been losing ground against the greenback since the start of 2021. It has declined 18% since then.
Here in Asian trading on Wednesday, one US dollar will buy you 121.13 yen. Those are levels last seen in February 2016 - a wacky year posting polar opposite trends to now. With Brexit scaring currency traders, the safe-haven yen strengthened 18.1% to break below ¥100 by August 2016.
Easy money continues in Japan
In 2022, the central Bank of Japan is out of step with the U.S. Federal Reserve. BOJ Governor Haruhiko Kuroda on Tuesday defended Japan's super-easy monetary policy before the Japanese parliament. The BOJ last met on rates last Friday, maintaining its massive stimulus program designed in part to encourage inflation.
Japan is still struggling to generate its targeted 2% rate of inflation. But higher fuel and commodity costs provoked by the war in Ukraine could finally get the Japanese rate to that point. Consumer prices rose 0.9% year over year in February, with fuel costs up 15.3% and food up 2.8%. Japan imports almost all its fuel, making it the world's fourth-largest oil-importing nation behind China, the United States and India.
Kuroda said after the BOJ's last meeting that inflation could move to 2% from April onward, but that it would be "inappropriate" to tighten monetary policy in response to such short-term commodity fluctuations.
The U.S. Federal Reserve has begun raising interest rates later than some Asian central banks. South Korea has already lifted rates three times, starting last August, with New Zealand another early hawk, also imposing three rate hikes.
But the story is very different elsewhere in Asia. The BOJ stunned the world in 2016 when it introduced negative interest rates, a practice many central banks followed in response to the pandemic. Japan still maintains a short-term rate target of -0.1% while aiming to keep the 10-year bond yield around zero.
The yen could breach the ¥123 mark in April and May, according to Nomura currency strategist Yujiro Goto, although he expects the momentum to weaken. The market is factoring in how aggressive the Fed will be, with an odds-on 50-basis-point hike in May, while Japan's stance on monetary policy is very steady and predictable.
China is also at odds with the general trend toward tightening in the West. The Beijing government is deploying a variety of stimulus measures to ensure China can hit the 5.5% growth target for 2022. A cabinet committee meeting this time last week pledged to support both the stock and property markets, which are suffering a crisis of confidence, as I outlined last Wednesday.
The National People's Congress in Beijing earlier this month outlined a series of fiscal measures that promise support to the tune of three percentage points of GDP. The central People's Bank of China may yet cut policy rates by another 20 basis points and cut reserve requirement ratios at banks by 50 basis points.
The Chinese yuan, which doesn't float freely, has been on a strengthening trend since May 2020. But it, too, has weakened this month, albeit to a lesser degree than the yen. The Chinese currency has lost 1.0% in March.
And then there's COVID
The Japanese economy will get a boost with the lifting of COVID restrictions despite an ongoing outbreak. Tokyo and Japan saw record infection rates in February, but daily new infections have now fallen from a high of 104,345 on Feb. 3 to 20,152 on Tuesday.
Bars and restaurants therefore had their business-hour restrictions lifted on Monday, when Tokyo and 17 Japanese prefectures removed all "quasi-emergency" measures, with some form of restriction on activity in place since Jan. 8. Monday was a public holiday in Japan to mark the vernal equinox and tourist sites reflected the newfound confidence with rising numbers of visitors despite a cold snap that has brought snow and near-freezing temperatures as far south as the Japanese capital.
The "quasi-emergency" restrictions were less imposing than in previous rounds and varied by prefecture, but they cut operating hours for eateries. Tokyo required restaurants to close by 8 p.m. or 9 p.m., depending on category. Citizens were asked to refrain from non-essential outings and to avoid crowded places. Venues with "loud live audiences" were capped at 5,000 people, while events with quieter audiences could file an anti-infection plan and operate at capacity.
The economy is also looking to shake off the short-term effects of a 7.4-magnitude earthquake off the northeastern coast last week. The government here on Wednesday lifted a warning on the tight electricity supply, in effect since Monday, that asked companies to turn off neon signs and households to turn down their thermostats. Blackouts were narrowly avoided as six thermal power plants were idled by the quake.
Even if Japanese inflation comes close to 2% for portions of 2022, it's unlikely to sustain that level. So the BOJ looks set to maintain its stance at least until the end of Kuroda's second term in April 2023, if not beyond. Even though - shock, horror! - some Japanese companies have taken the "drastic" step of raising prices for the first time in decades, it would take consistent wage growth for Japanese policymakers to feel secure that the deflation beast is slain.
With global growth slowing, it is not lost on Japan's central bank that a weak currency gives a welcome boost to Japanese companies selling into weakening markets. So Japan will tolerate, even enjoy, the foreign exchange market movements unless there's a further dramatic lurch.
"The yen can be viewed as a yardstick of the BOJ's tolerance for policy divergence," T.S. Lombard senior economist Konstantinos Venetis wrote. "The message from Bank officials recently has been that a weak yen is, on balance, positive for the economy. That view is unlikely to change in the near term."