In times of distress, Yen has always been used as a key hedging tool by most of the market followers. This may be a smart move for an astute investor but the direction of JPY is playing havoc with its country’s fundamentals. The journey of Yen from Jan’16 to Jul’16 has been quite interesting. From 120.3 levels it has fallen to 103.2 levels while writing. The appreciation of more than 14 per cent in the currency is a hard-to-ignore trend, especially for a country that requires a weak currency to boost their exports.
The slump could be linked to the on-and-off speculations of US rate hike timings along with the pre and post Brexit issues. Not forgetting, the slow-moving economies of member nations of Euro-zone and Asia. Lack of agreement between the OPEC countries is also playing its cards well. Even slight negative news in the market sparks volatility which is slowly affecting the investment drive of the investors. Instead of capital appreciation they are now chasing capital preservation which is hampering Yen’s direction given its safe-haven element. This in turn is hurting the price competitiveness of Japanese exports in foreign markets which is one of the reasons for fall in exports. Another reason is the sluggish private consumption in China and other Asian countries which is Japan’s major trading partners. The total value of exports which once stood at 6337.85 billion yen in the last quarter of 2015 has now dropped to 5090.95 billion yen as on 13th Jul’16.
Sulking demand and low output growth is disrupting Japan’s industrial and manufacturing sector. Companies are struggling to make profits due to which they are either cutting wages of their employees or firing them. Lack of disposable income in the hands of Japanese consumer has led to decline in household spending and consumer confidence. Furthermore, Japan’s aging population that has decreasing birth rates and longer life-spans has also become an issue to the economy. Savings has declined owing to surge in pensions and healthcare facilities. The government thus is struggling with less monetary resources and mounting debt load which has left the country in the hands of deflation.
BoJ is trying hard to increase spending and boost growth. It first infused YEN 10.3 trillion stimulus package in 2013 thereafter surprised the markets by announcing to adopt negative interest rates in 2016. This was undertaken to encourage commercial banks to lend more money which would help stimulate investment and growth. However the move backfired pretty badly.
Instead of weakening as per theoretically, Yen has strengthened and inflation has further moved into negative territory. BoJ authorities are blaming global factors for this strength due to which the effect of unconventional tool adopted by them is not showing any desired results.
In spite of the negative criticism, Japan’s PM has vowed again to kick-start the economy after winning the recent election in the upper house. This has raised expectations for further monetary stimulus in Jul’16 Monetary Policy Meeting.
If this even happens, Yen will depreciate sharply in turn benefiting several India-based subsidiaries of Japanese companies as they enjoy lower cost of raw material imports from Japan. Indian firms who borrow in Yen will also profit from JPY weakness. Hence any change in Japan’s fiscal stimulus program will definitely provide some breather but it’s hard to tell whether these efforts will stimulate Japanese growth.
(The author is associate director, commodities & currencies at Angel Broking)