The Bank of Japan is determined to cheapen the currency of the world’s third-biggest economy. Who might be the winners and losers, both at home and abroad?
On Friday, the yen ended trading with its first two-week decline since May on speculation of further monetary stimulus at the Bank of Japan’s (BoJ) July 29 policy meeting.
Despite policymakers’ hopes, the yen has actually strengthened by around 14 percent this year against the dollar, due to its “safe haven” status in the wake of geopolitical shocks such as Brexit. Meanwhile, both retail and consumer prices have slid in recent months, with analysts pointing to a persistent deflationary mindset.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
While BoJ Governor Haruhiko Kuroda has dismissed the notion of using “helicopter money” to spur spending, he has stressed his willingness to ease policy further if required to achieve the central bank’s 2 percent inflation target.
“If the economy’s [recovery] trend continues, leading wages and prices to rise in a virtuous cycle, which is continuing, prices will eventually rise to the 2 percent price stability goal,” Kuroda said Saturday at the G20 meeting of finance ministers in China.
“We always examine risk factors for the economy and prices and will take additional easing steps if necessary to achieve the price stability goal. I’ll explain that together with Japan’s economy, prices and monetary policy at this meeting.”
According to Reuters, a majority of economists expect the BoJ to ease policy further at its next meeting.
“The yen should still be a sell in the run-up to the BoJ and supplementary budget announcements,” Mizuho’s Neil Jones told Bloomberg News.
“While there’s a risk of no change in policy on July 29, I still think it’s just a matter of time before there’s further stimulus for Japan.”
The benefits of a weaker yen include higher profits for exporters, given that North America accounts for around a quarter of Japanese listed companies’ profits, according to WisdomTree Japan’s Jesper Koll.
Other benefits include greater investment and higher wages in export-related sectors along with rising stock prices, while the imported inflation from a cheaper currency also boosts efforts to combat deflation, particularly in the wake of cheap oil prices.
Conversely, the losers from a falling yen include importers and workers in non-export sectors, which face potentially higher prices at the supermarket without enjoying extra cash in their pay packets. This is reflected in opinion polls showing despite majority support for Prime Minister Shinzo Abe’s Cabinet, only a third are confident that Abenomics will lift the nation’s economy out of its funk.
Nevertheless, with both fiscal stimulus of up to 4 percent of gross domestic product and further monetary easing in the pipeline, the side effects will reverberate around the world.
According to Koll, Japanese capital has already “flooded” global markets in the past year as Japanese investors chase higher yields overseas. In the four months through April, Japanese investors bought about $110 billion worth of global securities, “the biggest amount of net buying in any four months period on record,” following up from $230 billion worth of net buying for calendar 2015.
“Clearly, negative rates at home are working to push Japan money out into the world,” Koll said.
Indonesia, South Korea Most Affected
For Asia though, ANZ Research has identified a number of winners and losers from a cheaper yen.
“Indonesia stands out amongst the ASEAN economies as the clear ‘winner’ from a successful Japanese reflation given that its exports are highly leveraged to Japan’s domestic demand, as indicated by its high reading of the trade complementary index,” the Australian bank said in a July 22 report.
“By contrast, South Korea’s exports would be less competitive than Japan’s should yen weakness persist given its high export similarity with Japan. Significant yen depreciation (whilst not our base case) amid the current bout of soft external demand and subdued global trade flows would put pressure on Asian currencies and further complicate monetary policy in this region.”
Asian economies that are net importers from Japan would benefit from paying cheaper prices for Japanese goods. These include Singapore, South Korea, Taiwan and Thailand. However, net exporters, particularly Malaysia and the Philippines, could lose as Japanese firms are required to pay more for their goods.
India though would remain “largely immune” to a weaker yen, since despite being a net importer, only 2.3 percent of its trade is conducted with Japan.
Yet despite a potentially weaker currency, the “hollowing out” of Japanese industry could still continue, ANZ said.
Japanese outward foreign direct investment (FDI) is expected to continue into Asia, as Japanese firms move parts of their operations offshore to maintain competitiveness and in response to rising Asian demand for consumer goods, the report said.
“In fact, the pace of outward FDI from Japan might gather steam as economic growth and corporate profitability return to Japan. Moreover, with the proliferation of regional and bilateral investment agreements to increase investment flows, liberalization of formerly protected sectors, and improved quality of infrastructure in emerging Asia, Japan’s outward FDI into Asia will continue to increase in the years ahead,” ANZ said.
For Asian currencies, the currencies of Singapore, South Korea and Taiwan are considered “the most sensitive to yen movements,” while the Indian and Indonesian currencies should “stay resilient, especially should Indonesia be able to leverage off any pick-up in Japan’s domestic demand.”
Yet should Kuroda fail to deliver, further yen appreciation could hit Japanese companies’ profits, ANZ warned.
The banks’ economists said recent yen strength had caused “massive concern” for Japanese companies, particularly those with large investments in China, where the combination of a weak yuan and strong yen had a “double whammy effect.”
“Anecdotally, many Japanese companies have used 105 [yen to the dollar] in their budgeting and planning processes. Hence, any level [toward] 100 or lower will have a material impact,” ANZ said.
Changing expectations after two decades of deflation has not proved easy for Kuroda, despite the record stimulus delivered under Abenomics. But with the world economy still struggling to pick up speed, a stronger Japanese economy would be welcomed, despite its currency side effects.