This blog post was originally published on my LinkedIn page on June 8, 2022 here.
Here you can see the data from 2002 for the USD/JPY.
And here is a nice table showing the highs and the lows for each year going back to 1972.
So we might be on the way to getting a cheaper yen than in 2002, so after beating that low, we would have to go back to 1998, when the yen was at 147 for 1 USD. I am not going to go that far back in time in this post (as I was not even in Japan at that time, so why would I care). What I want to do is look at the latest cheapening in the yen, which started in 2012 with the coming of Abenomics - the economic policy of then PM Abe, aiming to revitalize the Japanese economy by bringing a weaker yen. But why does Japan need a weaker yen?
Well, let us start with the obvious things. I am a salaried worker in Japan. Imagine that my annual salary is 8 million yen after taxes. For ease of calculation with USD/JPY at 80 in 2012 that would translate to $100,000. In fact, the USD/JPY at levels under 80 was the strongest the yen had ever been, which came as a result of the 2008 financial crisis and the following QE (Quantitative Easing) done by the US Federal Reserve, which drove the USD lower and the yen higher. So yen earners had it really good at that time (2009-2013), as their yen could buy them more around the world. This does not mean that the Japanese economy was doing great though.
On the contrary, the strong yen meant that the backbone of the Japanese economy - Japanese companies, who earned selling Japanese products overseas, would get less in yen for the products they sold in USD, as the prices overseas could not be increased just to make up for a strong domestic currency. For example, if you sold a $100,000 car in the USA, you would get 8 million yen for it at 80 yen per USD. Compare that to the usual exchange rate of, let us say 100 yen per USD, when you get 10 million yen (an extra 2 million yen). So according to this logic, Japanese exporters were not happy with the strong yen, and they put pressure on politicians to weaken the yen. Enter Shinzo Abe.
Shinzo Abe became PM of Japan for the second time in 2012. He immediately made in clear that the yen must go lower. How low? The lower the better. This was Abenomics - low yen, more foreign income for the exporters, then they will bring their FX reserves to Japan, and that will revitalize the Japanese economy. And indeed, fast forward to 2022, we have the yen at 130 yen per USD. The same car at $100,000 (maybe a newer model) now brings 13 million yen to the Japanese exporter. That is 60% more than 2012. So the exporters obviously are winning from the weak yen. But how about the Japanese salaryman.
Yes, thank you for remembering about me, the Japanese salaryman. Remember my salary of 8 million yen gave me $100,000 in 2012. Now how about in 2022? Let us keep my salary unchanged for this exercise. So in 2022, I will get a little over $60,000 if I exchanged my salary to USD. Actually, just last year I would have received over $70,000 at the average exchange rate of 110. I lost 15% in just one year, but what makes a bigger impression is the 40% drop in my purchasing power in USD for these 10 years. Add to that a little bit of inflation, which we are finally feeling this year, and it is not nice. Workers in Japan are getting less and less for their yen. Although in most cases Japanese people do not buy directly from overseas, a lot of the stuff they buy is imported, or even if made in Japan is made using imported materials. When the yen gets weaker, the prices of those imported goods go up. So the workers' purchasing power goes down together with the yen. Indeed the biggest loser of the weak yen are the salaried workers. Salaries in Japan are known to go up painfully slowly, at about 2-3% per year if you are lucky. And actually the salaries did not need to go up from 2002 to 2012 as the yen was getting stronger by 40% from 130 to 80, and thus their purchasing power was going up by 40%.
Now back to the weak yen and winners and losers. In terms of businesses, remember when we said that the biggest beneficiary of a weak yen are the exporters? Well, opposite to them are the importers, who are the biggest losers of a weak yen that eats into their profits, as it is not easy for them to raise prices just because their importing costs went up. Not the whole Japanese economy is made up of exporters. And actually even the exporters have imports, which are costing them more with the weaker yen. So here the big question is: how much is too much? How weak is too weak? When will the Japanese government and the Bank of Japan start saying that the yen has gone too far and they cannot accept any further cheapening? At the current moment, the BOJ's governor Kuroda claims that all is good, and that the weak yen is good for the Japanese economy, as long as the moves are not too rapid, although his rhetoric is becoming a bit more nervous as the yen is attacking 135. If we see a break of 135, I expect the Japanese authorities to start trying to do something, even be it just jawboning. With the yen so weak, and actually oil high even in dollar terms, Japan is seeing the highest gasoline prices in more than 20 years. That hurts businesses for sure, but allow me to once again remind you who is the biggest loser here.
The biggest loser are the working class, as their monthly paycheck will buy them less and less every month - already over 10% less than last year. And unfortunately any salary increases will not come this year, maybe next year for the lucky ones. So expect PM Kishida to become really nervous about the next elections, as the opposition parties will gather more support with the economic woes of workers. Too weak a yen is not always a good thing, but remember how hard it was to get the yen to go weaker 10 years ago. Now why would we assume that it would be so easy for the Japanese government to reverse its course? Making one's currency strong or weak at will is not that easy.
I will not be going into a more sophisticated discussion this time, although that might be appropriate here. Perhaps I will revisit this topic at a later stage. What I can say in conclusion is that the yen could easily go down to 150 this year. How am I protecting my savings? Obviously I am not rushing to exchange all my yen to USD. I do however invest mainly overseas, so I am protected naturally from yen weakening by having an internationally diversified portfolio, despite of the fact that my monthly paycheck is in Japanese yen. But who knows what will follow? The yen might grow strong again, as usually happens in economic crises, and we might be headed for one this year. I have learned one thing in my observation of the FX markets - moves are easy to rationalize and explain in hindsight, but all is a coin toss in advance. Let us keep watching.