Yen surge unlikely to faze Japanese corporates

By:
Peter Garnham
Published on:

The yen’s surge from a near five-year low against the dollar is not likely to cause much angst among Japanese corporates, which appear comfortable with the currency around present levels.

USDJPY fell over two big figures as traders scrambled out of one of the most popular long positions in the market overnight on Wednesday. The currency pair dropped from ¥103.50 to below ¥101.50 as a near-perfect storm of central bank rhetoric and worrying economic data led to the yen recovering its haven status.

The yen advanced and Japanese equities tumbled more than 7% as comments from Ben Bernanke, chairman of the Federal Reserve, that the central bank was starting to consider reducing its asset purchases combined with weak Chinese economic data to quash investor risk appetite.

Risk aversion was only heightened more by price action in the Japanese government bond market, with 10-year yields hitting 1% at one stage. That meant the 10-year yield had risen threefold since the Bank of Japan announced its aggressive asset purchase plans at its April meeting, a worrying development for a country that has a 200% debt-to-GDP ratio.

Still, even given the sell-off in USDJPY on Wednesday, the yen is still is still down over 25% since the Japanese government under prime minister Shinzo Abe was returned to office with a pledge to fight deflation and tackle the overvaluation of the currency.

Indeed, a survey of 400 Japanese businesses, half of which were manufacturers, conducted by Reuters this week, suggests that the country’s corporate community believes the government has delivered its pledge on the value of the yen.

Almost half the businesses said the yen’s decline had been sufficient, with more than a third saying they would like to see the yen recover somewhat. Only 15% of respondents sought further yen depreciation.

The Reuters survey found 48% of businesses wanted to see USDJPY stabilize around ¥100. Just 7% wanted to see ¥105 and 8% ¥110. In contrast, almost 30% wanted the dollar to fall back to ¥95 and 10% preferred ¥90.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says the findings of the poll suggest that Akira Amari, Japan’s finance minister, was not talking off the top of his head earlier this week when he said that the correction to the yen’s strength was complete – comments that he later softened under reported pressure from his cabinet colleagues.

Indeed, Chandler believes that the survey adds a nuance to the so-called global currency war that has attracted so much attention in recent months.

He says globalization has complicated corporate interests, meaning a weaker currency is not always beneficial and a stronger currency is not always harmful.

“The diversity of corporate strategies, the varying elasticities of demand and different competitive environments for their products mean that it is difficult to generalize the currency views of Japan Inc,” says Chandler.

Still, as Chandler notes, corporate FX flows are swamped by financial flows, and are tiny in comparison. That means that while the corporate views of the USDJPY rate are interesting, it is difficult to extrapolate a strategy from them to trade the yen.

“Short-term speculators, momentum players and trend followers may be more important for the day-to-day moves than Japanese businesses,” he says.

The sharp dive in USDJPY on Wednesday night when traders bailed out of long positions would seem to bear that out.