The Return of Yendaka
With investors fleeing to the safe haven of the Japanese yen amid global stock selloffs and growing fears of a worldwide recession, Japan’s formidable export machine appears headed for significant losses as some of the country’s biggest exporters get blindsided by the fast-rising currency.
Japan's Economic and Fiscal Policy Minister Kaoru Yosano said should the yen appreciate by ¥10 against the US dollar, Japanese exporters would lose ¥1.3 trillion (US$14 billion). He was speaking on TV Asahi's news discussion show Sunday Project.
Should the yen rise by just ¥1 against the dollar and the euro, Sony Corp. would lose ¥4 billion and ¥7.5 billion respectively, because the export-oriented electronics group had predicted the yen would trade at 100 per dollar and 140 per euro, a spokesman said in a interview Monday.
Toyota Motor Corp. also said if the yen appreciates by ¥1 against the US dollar and the euro, it would lose ¥40 billion to ¥60 billion on an annual basis, respectively, because Japan’s biggest carmaker had predicted the yen to trade at ¥105 per dollar and 161 to the euro.
Although Japan has asked the Group of Seven to act to stem the yen’s rise, the G-7 has been unable to act together. On Monday, according to Bloomberg, despite a statement cautioning against “excessive volatility” in the yen, the G-7 fell short of pledging concerted action, leaving Japan’s Finance Minister Shoichi Nakagawa to say Tokyo is ready to act on its own if needed. In any case, if the Japanese monetary authorities were to intervene, it would be more out of concern for the plunging stock market that a surging yen has triggered. The Nikkei 225 promptly plunged Monday by 486.18 points, or 6.36 percent.
“The strong yen is hitting Japanese exporters when they are already down due to weaker demand from abroad," said Masaki Fukui, senior market economist in Tokyo at Mizuho Corporate Bank Ltd, a unit of Japan's second-largest financial group by market value. "Japanese exporters are experiencing the hardest time.”
A letup in worldwide consumer demand and the stronger currency have already started to harm Japan’s exports. The nation’s trade surplus fell 94.1 percent in September from the same time one year ago, Japan's Finance Ministry said last Thursday. Japan’s major steelmakers are considering output cuts, as a gloomy outlook for the world economy started curbing demand from the construction and automobile industries in Japan, China and elsewhere.
Whenever stock prices decline, the yen always appreciates because of risk reduction among investors. Then a stronger yen in return pushes down exporters’ shares, delivering a vicious spiral between Japanese stocks and the yen. The rapid rise of the currency has especially caught global hedge and mutual fund managers as well as Japanese individual investors by surprise, forcing them to unwind so-called yen carry trades, which under less volatile financial times allowed them to take advantage of Japan's ultra-low interest rates of 0.5 percent to buy higher-yielding assets in other currencies. Now the global credit crunch is forcing them to dump those higher-yielding assets funded by yen-denominated loans and bringing their cash home.
The yen has strengthened against all major currencies such as the US dollar, the euro and the pound sterling over the past year, amid what former Federal Reserve Chairman Alan Greenspan called a "once-in-a-century credit tsunami.'' The Japanese currency hit a 13-year high of 90.93 against the US dollar and a six-year high of 113.81 versus the euro on Friday. A rapid rise in the yen erode Japanese major companies’ profits, as they had expected the yen to trade at 102.48 yen for the rest of the fiscal year ending March 2009, the Bank of Japan’s Tankan survey said on October 1.
“Market sentiment is getting worse,” said Yuji Kameoka, a senior economist and currency strategist in Tokyo at Daiwa Institute of Research, a unit of Japan's second-largest brokerage. ``The yen may temporarily break through 90 per dollar and 110 per euro this year.”
The most commonly accepted view in Tokyo held by Mizuho’s Fukui and Daiwa’s Kameoka is that, the US, Europe and Japan all entered into recession last quarter. And many predict the US economy won’t recover until the middle of 2010 because housing prices still keep falling. This sort of pessimistic view keeps investors risk averse, pushing down stocks and up the yen.
Faced with the yen’s sharp appreciation, finance ministers and central governments from the Group of Seven major industrialized nations issued an emergency joint statement Monday expressing strong concern about the possible adverse effect of the currency's steep rise on the global economy and financial markets.
"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible negative impact on economic and financial stability," the G-7 statement said. "We will continue to keep a close eye on the currency market and cooperate as appropriate."
The last time Japanese monetary authorities intervened in currency markets was 2003 and early 2004, when they kept on selling yen and buying dollar to halt the currency's appreciation, drawing sharp criticism from US manufacturers. They sold a record ¥14.8 trillion in the first three months of 2004 alone. Thus mid-March onward, the Japanese authorities have kept away from the market. Japan hasn't purchased its currency since 1998.
“It should be hard for Japanese authorities to actually intervene in the exchange market,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's second-largest bank by market value. “Europe is happy with a weaker euro. U.S. automakers such as GM are also struggling a lot, preferring to a weaker dollar.”
Kosuke Takahashi is a former staff writer at the Asahi Shimbun and is currently a freelance correspondent based in Tokyo. He can be contacted at firstname.lastname@example.org