Yen moves: what next? | FT Alphaville

Yen moves: what next?

Having seen a steady rise back up from lows immediately after Japan’s March 11 disasters, the yen continues to defy economic gravity. It’s now up about 5 per cent against its post-March 11 low of Y85.53 against the dollar on April 6.

Among some observers, the ‘capital repatriation theory‘ has revived somewhat in recent days in efforts to explain the currency’s strength, amid growing complaints by Japan’s top manufacturers about the effect of the strong currency on their exports..

In the weeks following March 11, predictions abounded of a massive surge in yen inflows on repatriation of funds by Japanese companies and institutions, seeking to offset losses related to the disasters or trying to reduce risk by increasing their FX hedge ratios on foreign exposures. But the surge hasn’t happened – or at least, not on the scale many predicted, according to official figures.

Nomura in a Thursday note confirmed that view, saying:

According to the Balance of Payments data released today [Thurs May 12] , JPY655bn (USD80bn) was repatriated to Japan from overseas subsidiaries in March, down slightly from the JPY760bn recorded in March 2010. This illustrates that Japanese companies have not rushed to repatriate cash immediately after the earthquake. Companies’ demand for funds did heighten after the earthquake, but we do not think that demand is so high that it will incite corporate repatriation of funds on a large scale.

Even so, growing problems at Tepco, Japan’s biggest power utility and operator of the crippled Daiichi nuclear power plant in Fukushima, prompted Tohru Sasaki, chief FX strategist at JPMorgan in Tokyo, to highlight what could become “one of the largest repatriations by a single entity after the disaster – Tepco.”

Japanese media including Nikkei and Jiji recently reported that Tepco was considering selling businesses or assets – overseas as well as in Japan – to finance costs related to the crisis at the Fukushima nuclear power plants.

The company’s foreign assets amount to about Y1,000bn, (or $81bn), and the latest local reports, on May 10, suggest Tepco may sell more than Y500bn of its domestic and overseas assets.

So far, however, there have been no big asset sales nor fund repatriation from Japanese investors – as evidenced by official monthly portfolio flow data for April, released on Thursday.

Japanese investor activity remained sluggish in April, after a moribund March, according to the data, says JPMorgan’s Tokyo  currency strategist Junya Tanase. Life insurers net bought Y61.3bn of foreign bonds in April. Although the total jumped from Y25bn in March, the April level was a fraction of the monthly average in the year from Feb 1 2010 of Y343bn per month, he noted, adding:

This level is particularly notable if we consider the fact that [Japanese institutions] tend to increase foreign bonds purchases in April, the first month of the new fiscal year (average monthly purchase in April 2005-10 was Y454bn).

Meanwhile, Tanase notes, retail investors became net buyers of foreign bonds in April, although the net purchase amount was still less than half the monthly average between February 2010 and Feb 2011 (Y258bn in April 2011 vs Y581bn per month, average between Feb10 and Feb11). Interestingly, Japanese retail investors also became net sellers of foreign stocks in April. Concludes Tanase:

The fact that we did not see any huge repatriation in March and April does not necessarily imply that this would continue to be the case going forward as well. We believe that these flows likely started occurring in the past few weeks, and will continue in the near future. Indeed, in the case of the Hanshin/Awaji earthquake in January 1995, Japanese net sales of foreign stocks peaked two months after the earthquake in March 1995. Also, Japanese investors turned to become net sellers of foreign bonds in March 1995  following five consecutive months of net purchases.

The latest news and data – including reports of the Tepco asset sales – would seem to support this view. Indeed, adds Tanase, weekly portfolio data issued Thursday show that Japanese investors also became net sellers of foreign bonds last week (net sales of Y716bn was the largest since the first week of December 2010).

What next for the yen?

There has been a tiny fallback in the yen in the last 24 hours to 80.83 to the dollar (from Y80.61) but it is still riding high from its six-month low of Y85.53 on April 6. In a recent note, JPM’s Sasaki took issue with the view of some currency analysts that the Japanese government would intervene to push down the yen at 80 USD/JPY.

There would be “no line in the sand at Y80”, he said, for a variety of reasons – some of which we highlighted from his earlier note on the matter, in late April. Above all, Sasaki argues, while yen strength has driven some of the currency’s rise, the dollar’s decline against the yen in the past month is mainly due to dollar weakness. Furthermore, he notes, it’s difficult for Japan to intervene to support the dollar while other G7 countries accept a weak dollar against their own currencies.

Second, says Sasaki, is the relationship between the currency and the stock market. For now, the Nikkei 225 average is not declining – and that, he says, is critical to the outlook at the Bank of Japan and the Ministry of Finance:

What matters for the BoJ/MoF is the Japanese economy and stock market, not the level of USD/JPY. The Nikkei index rose 5% in the past month and reached 10,000, while USD/JPY declined to 81 from 85. Note that the last two interventions (Sep.15, 2010 & Mar.18, 2011) were conducted when the Nikkei index fell along with USD/JPY and broke 9,000.

Capital Economics, meanwhile, in a Wednesday note dismisses speculation that the yen could revisit its post-war record intraday high of Y76.25 to the dollar set on March 17. While further gains are “of course conceivable” in the near term, it adds, “we continue to expect the yen to fall back to 90 against the dollar by year-end, from current levels of around 81”.

Managing director of FX strategy at UBS, Mansoor Mohi-uddin, takes it a step further, warning in Wednesday’s FT that “dollar bears ignore the greenback’s structural haven attributes at their peril…”

Related links:
The yen and economic fundamentals – FT Alphaville
Five reasons the yen will strengthen – FT Alphaville
The Bank of Japan’s big chance – FT Alphaville
What’s moving the yen? – FT Alphaville