More horrible numbers out of Tokyo on Wednesday, with news that Japan’s exports plummeted an annual 45.7 per cent in January, resulting in a record trade deficit amid collapsing demand for the country’s cars and electronics.
Bloomberg reports on Wednesday that Japan’s trade gap widened to Y952.6bn ($9.9bn), the most since comparable records started in 1980 and eclipsing December’s record 35 per cent decline.
Japan’s GDP shrank at an annual 12.7 per cent pace last quarter, the most since the 1974 oil shock, and economists predict the slump will drag into this quarter. Meanwhile, some of the country’s biggest companies – after forecasting big losses – are laying off thousands of workers, heightening the risk the recession will deepen.
But we’ve already heard a lot about Japan’s deepening economic horror story.
The big theme of the week is the loss of the yen’s status as a “safe haven” currency (inverted commas to acknowledge how desperate things are when the currency of such a bruised and battered economy is seen as both “safe” and a “haven”).
The yen fell to a three-month low of Y96.80 against the dollar on Tuesday as global stock markets continued to fall, reports the FT, “sparking speculation that the Japanese currency’s days as a safe haven were coming to an end”.
Yet, it was only last month that people such as Eisuke Sakakibara, the former “Mr Yen” of Japan’s finance ministry, was confidently predicting government intervention to bring the yen down. My how times change.
So, is the yen’s bull run coming to an end – and if so, is it temporary or longer-term?
Previous bouts of equity weakness during the financial crisis have triggered demand for the yen as investors unwound carry trades, in which the low-yielding yen had been sold to finance the purchase of riskier, higher-yielding assets elsewhere. This led not only to the ex-Mr Yen’s bold call for intervention, but also prompted currency strategists to predict a long and strong run for the yen – or at very least, wheel out their theories to explain the currency’s astonishing strength.
But, as the FT notes, that correlation has broken down over the past week, as all the Japanese economic indicators steadily deteriorate. And the Japanese government’s announcement on Tuesday that it is considering buying shares to prop up the stock market has done zilch to restore optimism. In fact, notes the FT in a Wednesday analysis, the move would take Japan down a well-worn – and not particularly successful – path in the region.
While all currency watchers today seem to agree the yen’s “safe haven” days are over – for now – there are widely differing views on how long that hiatus might last – and its overall impact on the economy.
“Call it a lucky break for Japan or proof that markets tend to correct themselves eventually,” said the Wall Street Journal’s Heard on the Street column on Tuesday.
The yen’s turnaround could be the start of bad news for yen bulls, but it’s great news for Japan’s beleaguered exporters, it said, noting that while the yen is still up 15 per cent against the dollar, it is backing off those gains quickly.
This only makes sense. As grim as the outlook for the US is, it’s only worse for Japan. The country lacks credible political leadership as its economy shrinks at its fastest rate since 1974.
The falling yen is welcome relief for Japanese exporters whose profits have been crushed by the stronger currency, and for the Japanese government, which has struggled with the temptation to intervene and weaken the currency.
Japan reports a slew of key economic data — including an update on its export situation Friday. In December, exports fell a record 35 per cent from a year earlier.
More dismal news on that front could see the yen falling further. At least some in Japan can find consolation in that.
Actually, there’s not much for exporters to get excited about; as CLSA’s Christopher Wood noted on Monday in Tokyo, the real problem for them is collapsing overseas demand for their goods, regardless of the price. In addition, a weaker yen will increase the prices of Japan’s imports, most likely further depressing consumption – the last thing Japan needs right now.
Yves Smith at Naked Capitalism, meanwhile, notes on Wednesday that the fact that Japan is now running trade deficits “also means they will not be accumulating foreign exchange reserves, specifically buying Treasuries (Japan could still buy Treasuries to lower the value of its currency, but the terrible economic news has already put the yen on a downward path)”.
Don’t be too sure however that the yen won’t revive its upward path, says JP Morgan’s chief Japan currency strategist Tohru Sasaki, who last month predicted a continued strengthening of the yen throughout the year. Sasaki said on Wednesday that unexpected factors behind the yen’s weakening include unwinding of yen-long positions in the currency market, Japanese stock sales by foreigners, surprisingly strong foreign stock investment by big Japanese pension funds and the worse-than-predicted trade deficit.
However, the yen could well rise against the dollar towards the fiscal-year end at the end of March or in early April, he says, “especially if the Nikkei breaks through its low of last October”. Such a slide in stock markets could undermine the risk tolerance of Japanese investors – including retail investors – prompting them to repatriate their overseas investments to shore up their yen cash.
Meanwhile, the steady deterioration of the economy, combined with the likelihood of imminent changes to domestic tax laws, will further encourage Japanese corporates to repatriate overseas earnings, he says.
Sasaki has said for some months that if Japan’s Diet approves the tax changes to lift corporate tax on the repatriation of overseas earnings (which could happen in coming weeks) Japanese companies would repatriate between Y4,000bn and Y7,000bn ($4.1bn-$7.2bn) this year.
But now, the marked slide in Japan’s stock markets and economy could significantly increase that amount, he says, as Japanese corporates – already experiencing difficulty in raising finance overseas – encounter more problems in domestic fund-raising and bring in more funds to offset their dwindling yen cash flows.
“We expect this transaction to be concentrated in April (if the new law is enforced in April) because corporates will need cash as soon as possible and they also fear further possible yen appreciation and losses to the value of their retained earnings”, Sasaki says.
In the short term, however, the yen could well go to Y99 against the dollar, although Sasaki expects more upside in EUR/JPY and AUD/JPY. “As both the dollar and yen have become weak currencies, these yen crosses have more potential for upside”.
Ashraf Laidi, of CMC Markets, meanwhile, says the yen has definitely lost its “safe haven luster”, but expects it to be a temporary pattern “during the current bout of risk aversion”:
The 3-month highs in USDJPY to 96.11 stands at the 38% retracement of the 110.41-87.28 pullback. Daily stochastics suggest extended gains in USDJPY to as high as 97.20. But the next key resistance is seen emerging at the 98.85 trend line resistance extending from the Aug 14 high.
All that said, we’ll leave you with the stark and simple observation of Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan, who told Bloomberg on Wednesday: “People are coming to realize that Japan is in deep trouble…Considering what’s happening on the export side, and the implications that has for the domestic economy, the yen is clearly not a buy.”
Related links:
Yen at a three-month low against the dollar – FT
Tokyo’s share plan not seen as a magic cure - FT
Japan’s exports fall by 46% - Naked Capitalism
Japan’s exports plummet 45.7% – Bloomberg
The yen’s rally ends – WSJ Heard on the Street
How and why the yen is the world’s strongest currency – FT Alphaville
And now a look at the yen – Long Room
Land of the Rising Sun – closer to the precipice – FT Alphaville