Japanese yen set to soar
TOKYO – It has been several years since Japan Inc lost sleep over the yen exchange rate. Say what you want about Shinzo Abe’s reform regime, but the prime minister has kept the peace in monetary circles.
As Abe heads for the exit, markets are buzzing around a stronger yen – a yen that tests the psychologically charged level of 100 yen to the dollar.
This could deal an indescribable blow to business confidence at a time when Asia’s No.2 economy is leaking multiple times. Japanese production is expected to have contracted by 21% or more on an annualized basis during the April-June quarter.
Now Japanese companies need to brace themselves and face a trio of reasons suggesting that a stronger yen is to be expected. These three reasons are Abe’s departure, a derailed US election and the sudden arrival of one of the world’s most famous value investors in the Tokyo markets.
Abe’s departure after nearly eight years in office led strategist Nicholas Smith of CLSA Japan to warn clients that 100 yen to the dollar was on the way, from 106 now.
It may not seem like a colossal gesture. But once the 100 level is crossed, market techniques would take over and accelerate the movement towards an even higher exchange rate that would hit exports.
There are some risks here. As Abe steps down as prime minister in mid-September, questions abound as to whether the Bank of Japan governor he hired in 2013, Haruhiko Kuroda, could stage his own exit.
Or, as a new national leader takes over, could Kuroda choose to rethink BOJ policies?
Deflationary forces are returning. In the best-case scenario over the past seven+ years, inflation has never even come close to the BOJ’s 2% inflation target. Wages never staged the massive, widespread increases that Abe promised.
The gross domestic product (GDP) is now lower than when Abe and Kuroda arrived on the scene.
Kuroda is “very much Abe’s man,” Smith said, raising questions about how long he could stay. No BOJ governor has ever served two full five-year terms and Kuroda is now in his second term. Moreover, Smith points out, “massive money printing is now neither effective nor sustainable.”
So, Kuroda might see a new government as a chance to reset the BOJ’s stimulus efforts. Any move by Kuroda to, for example, recalibrate the mix of assets the BOJ purchases to boost growth could boost the yen.
White House Wild Card
The Donald Trump factor is his own wild card. As early as the 1980s, when he was a real estate mogul, Trump rose up against Japan.
Ironically, Trump for a time owned the Plaza Hotel in Manhattan, the site of the most daring monetary pact in history. This 1985 deal to weaken the dollar against the yen is still in Trump’s mind as a model of American financial influence, which he made no secret of wanting to deploy again to gain a trade advantage over China. .
The question is whether Trump, by the November 3 election, will announce a large dollar revaluation. Trump is desperate to both appear strong on the world stage and secure a pre-election victory for exporters from the manufacturing states he needs voices to stay in power.
A weaker dollar could materialize in other ways, destroying the rest of the year for Japan Inc. One is a new, massive round of dollar impressions by the Federal Reserve. The other is preparing for the American elections.
“Everything remains to be played politically, but the risk of a change of regime is likely to weigh on the dollar with the approach of the elections of November”, estimates the analyst Will Denyer or Gavekal Research.
The Chinese yuan is already under upward pressure. But Trump would like a significant upward revaluation of Beijing for which the The art of business the president could take credit for that.
The third force that could push the yen higher is Warren Buffett.
Interestingly, the “Sage of Omaha” picked three days after Abe announced he was stepping down to unveil a $ 6 billion investment in five old economy trading houses – the so- saying sogo shosha giants of commerce, some dating back a century or more.
They have long existed as middlemen to procure the natural resources and goods needed to fuel Japan’s post-war boom and help deliver Japanese exports overseas. In recent years, they have diversified into clothing, food, machinery and financial services.
Global punters have been betting big on Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo for many years, not to mention taking 5% of each other’s capital. And Buffett is hinting that he might double those stakes at some point.
Unsurprisingly, Tokyo stocks surged this week. Imitators are expected to zoom in on the Japan lane to find their own undervalued, cash-rich, low-risk Japan Inc icons. These inflows will fuel the yen’s advance.
“It’s Buffett’s continuation spreading its international wings,” said analyst Stephen Innes of online forex trader AxiCorp. He adds that with a string of recent bets, Buffett “could diversify away from the US dollar.”
Last month, Buffett wowed investors by betting on gold when he took a notable position in miner Barrick Gold. This, like a massive bet on Japanese trading houses, suggests that Buffett is hedging himself against significant risk.
This risk could certainly be a fall in the dollar which destabilizes the American debt and the New York stock exchanges.
Buffett, after all, has sold quite aggressively in the United States – around $ 11 billion in shares in the first six months of 2020. Stakes Berkshire sells include JPMorgan and Wells Fargo.
It has also sold blocks of carriers like American Airlines, Delta Air Lines, Southeast Airlines, and United Airlines.
Either way, the gap between US and Japanese yields is widening, with Japan rising slightly while the US is falling. This, notes Taizo Ishida, portfolio manager at Matthews Asia, is normally a telltale sign that the yen is going to rise.
Whatever success the Abenomics have had, it’s the result of a double-digit drop in the yen.
Recent business confidence surveys, including the heavily watched BOJ Tankan survey, have yielded the worst results since at least the global financial crisis of 2008. Concerns about a stronger yen hurting the export competitiveness and reduced profits are expected to weigh on investment decisions.
In the April-July quarter, Japanese companies saw their current profits nearly cut in half as about 20% of sales disappeared amid the pandemic, the finance ministry said this week. This is the biggest drop since the “Lehman shock” 12 years ago.
Sales have now fallen for four consecutive quarters. The April-June period saw current profits fall by 47%. This trajectory will worsen further as this trio of factors pushes the yen up at what is essentially the worst possible time for Japan Inc.