This is the second part of my discussion on the Japanese yen weakness of June 2022. You can read the first part here.
The first part was written 3 weeks ago, and back then the USD/JPY exchange rate was at a little over 134 yen. At that time the yen cheapening was capped by the 135 level, which was the 2002 yen low. Fast forward a few weeks, and 135 has been broken. Now we have 24 year highs/lows (highest since 1998). The exchange rate briefly popped above 136, but the air there was too rare, so today, June 27, we are back around 135.
In this follow up article I will discuss two points:
1. Why is the yen not shooting higher now?
2. Coming from the title of the article, why do some Japanese companies now see the cheap yen as a negative?
Regarding point 1, let me give you an explainer in as simple a way as possible. The reason that the yen was blocked under 135 for a few weeks was that there was multiple sell orders at that level. It took about two weeks of persistence from the buyers to clear those orders at 135. At the current time the exchange rate is at 134.96, having reached a high of 136.30 last week. Most likely, the big orders up to that level have now been cleared. So why does the yen not go to moon right away? Some pundits have been calling for 150. Some even made dubious statements of the sort, there are mostly no sell orders up 140, so it would be free sailing. Some Japanese companies are even panicking and starting to think of hedging the exchange rate, i.e. fixing their dollar buying at 135 being afraid they would have to pay 150 soon if they didn't do anything.
Well, not so fast. In order for the yen to reach 150 to the dollar, you would need to have a much bigger imbalance between buyers of the dollar and sellers of the yen. Since the price has been unable to break higher than 136, obviously at these levels there are not enough yen sellers. In other words, most likely Japanese companies have still not thrown their national pride through the window. On the contrary, although this is not widely reported, there are some Japanese internationals, who have been repatriating dollars to Japan at current levels. In other words, they are sellers of dollar and buyers of yen, which makes the yen stronger. Although I can not get official confirmation for this (no one can), I am pretty sure (I have hearsay evidence) that Japanese companies have been selling millions of dollars, which would be enough to cap the yen weakening for a while.
Actually, this selling of dollars to buy yen is exactly the main effect the Japanese government has been hoping to achieve through stimulating the weakening of the yen. Japanese multinationals keep billions of dollars overseas. This money is part of the Japanese economy in theory, but being overseas it cannot help revive the Japanese economy domestically. The only way it can help Japan would be if the money were exchanged to Japanese yen and brought back to Japan. Although some of the money will still not be invested and stay in cash, at least some of it would be invested in Japan, and that would stimulate the economy, which hopefully would create the trickle down effect the Japanese government has been hoping for.
So to summarize point 1, do not expect the yen to hit 150, even 140 until the effect of Japanese multinationals exchanging their dollars to yen becomes weaker than the effect coming from the interest rate differential, which is the main driver for the weakening of the yen in the first place.
Now on to the second point, which is the title of this article.
I got the information about this survey from this article in Japanese. The survey mentioned in the article was actually made before the 24 year high was hit - it is about the May highs over 130, which were 20 year highs - the ones discussed in my first article.
The research company that made the survey regularly asks its customers about the effects of the exchange rate. The last time they did the survey in April 2022 the exchange rate was at 122-124 yen, and 39.6% of the companies replied negatively.
In the latest survey when the exchange rate was just over 130 yen the negative response went up to 46.7% - almost half of the companies. Naturally at the current rate of 135, we would get even a bigger increase. The article also notes that the average exchange rate estimate the main manufacturers have set for this fiscal year is 105.5 yen, which is a huge difference (30 yen) from current levels. Another point worth noting is that smaller companies are giving particularly negative answers, while the big companies, especially if they are exporters, might appreciate a bit more weakness in the yen. Of course, even they are feeling the pain from the rising prices of commodities, which coupled with the weakening yen make for increasing inputs, which eat into their bottom-line even after factoring in increased overseas income due to the weak yen.
Also, let us not forget about hedging. Many companies fix their exchange rates with financial institutions. So even if the yen gets weaker, their actual rate is different (as mentioned in most cases it is 105 yen). But again, hedging is for the rich - it is a service which the poorer and smaller companies cannot afford. So if you are a small apparel company or another importer marketing foreign goods on the Japanese market, you most likely did not hedge the exchange rate, and now have to pay more yen for the same goods you bought cheaper a few months ago. Of course, you could increase prices for the end consumers (PLEASE DON'T), but most likely you try to delay price increases as much as possible, as you are afraid of losing customers.
So here we go with part 2 on the Japanese yen weakness. I sincerely hope that I do not have to write another update next month. If the exchange rate calms down and stays under 135, most probably we are done. But in case we race to 140 and higher, you can expect to hear from me again. Unfortunately...