Japan plays its Trump cards to weaken yen
Many factors point to further weakening of the yen versus the US dollar, which is bad news for other Asian exporters
Asian firms who compete with Japanese exporters may not welcome it, but while Japan’s currency has slumped in value versus the dollar since Donald Trump was elected as the next President of the United States, the yen’s slide may have further to run.
First off, yields on US Treasuries have spiked, with the US bond market selling off since Mr Trump captured the White House, despite the fact that his inauguration doesn’t take place until January and that there will then be a material time lag before his Administration’s spending plans take effect.
Yet that bond market move is wholly logical. If there is a perception that something will be worth less tomorrow than it is today, then any potential seller of US paper would be foolish to wait.
Of course, by simultaneously making the prospective returns on US investments look more attractive in comparison to those on offer elsewhere and also making the cost of servicing dollar debt more expensive, the rise in US yields feeds demand for the dollar.
That’s a bandwagon the currency markets have been quick to jump on.
And this is even before another rate hike by the Federal Reserve which must surely now happen next month. Last Thursday’s US consumer price data for October showed the biggest uptick in six months and weekly claims data for US state unemployment benefits came in at their lowest level since 1973.
It seems highly unlikely that the drivers of the higher US dollar following Donald Trump’s presidential victory are going to disappear any time soon. In dollar/yen those drivers may become even more pronounced.
The Bank of Japan (BoJ) has made it quite clear that rising yields on Japanese government bonds (JGBs) are to be resisted and have no place in the country’s pursuit of inflation.
“Moves in [US] Treasuries do have an impact on Japanese bond yields,” BoJ Governor Haruhiko Kuroda told a Japanese parliamentary committee on Thursday. “That does not mean we have to automatically accept gains in Japanese bond yields every time Treasury yields rise.”
As the BoJ leans against rises in JGB yields, that should widen further a Japan-USA interest rate differential that already favours returns on US Treasuries over Japanese paper, in the process making the Japanese yen even less attractive compared to the US dollar.
And then there is a possible disequilibrium between competing demand for dollars and yen between Japan’s importers and exporters.
Japan’s exporters’ hedging requirements require the exchange of dollars earned overseas for yen, with the process driven by many factors, but centering on an internal budget rate target, which corporate treasuries seek to match or better.
With that in mind, exporter hedging activities then revolve around the market level of dollar/yen, its level in the future incorporating a forward point adjustment to the spot price, an evaluation of the currency pair’s direction of travel and, crucially, the size of internal forecasts of future sales.
Any exporter that thinks their future sales are going to fall materially, having marked down their sales forecasts, will likely scale back their hedging activities. Donald Trump’s protectionist campaign rhetoric may make anyone, not just Japanese exporters, wonder if their current US sales forecasts are overly optimistic.
That could mean Japan’s exporters choose to sell fewer dollars versus the yen even though the exchange rate move is in their favour.
There’s also the very real possibility that Japan’s exporters have in fact already done a lot of hedging this year. The slide in the value of the dollar from 120 yen in January to below 101 in July undoubtedly focused exporters’ minds, especially as it was accompanied by shrill rhetoric from Japan’s policymakers.
June’s Brexit vote in the UK saw safe haven demand for yen driving the dollar/yen briefly below 100, prompting Finance Minister Taro Aso to rail about “one-sided, rapid and speculative” currency moves.
In that atmosphere, where it seemed likely the dollar would be lower versus the yen tomorrow than it was today, it would have been perfectly rational for Japan’s exporters to unload greenbacks on any brief rallies in the exchange rate while the country’s importers might have held back in expectation of buying the US currency more cheaply.
Japan’s exporters may now have fewer dollar receivables to hedge even though the exchange rate has gone their way while Japanese importers may still have to buy greenbacks even as the dollar is rising.
Trump may be president-elect but the trump cards seem currently to be falling Tokyo’s way when it comes to weakening the yen versus the dollar.