Those who have been around the foreign exchange trading block for a while will no doubt be aware that the Japanese yen has long since had a reputation for being a rock-solid currency. In recent years, it has developed a reputation for being one of the world’s “safe havens,” a currency that investors turned to whenever the going got tough.
However, there has been a range of upsets in recent months as the currency has reached new lows. This blog post will explore why this has happened and examine what the broader context looks like for the currency.
As any forex trader should know, staying on top of the latest forex news using a reputable site like LeapRate is an excellent idea – not least because it can give you the background to interesting developments like this one, the largely unexpected weakening of the formerly “safe haven” Japanese yen.
The yen has suffered from huge dips recently. Charts show that the yen reached its worst position in 24 years this month. This comes against a complicated backdrop of other problems for the Japanese economy, including the Nikkei stock exchange – which was down by 3% at one stage during the day. The index usually performs better when the yen is struggling due to Japan’s large number of exports. The Japanese government is now being called upon to tighten its monetary policy.
The reasons why
The reasons for this are complex, although one is that competition from other currencies has been high. The US dollar has been surging recently, and some investors have been moving away from the yen to get a slice of greenback action. Interest rates have been hiked up in the US due to various problems, including the economic impact of the coronavirus pandemic – with policymakers looking to encourage investors and spenders to behave in certain ways. The knock-on effect for the dollar has been to rise in value.
Another reason for the yen’s problems is that the aforementioned monetary policy in Japan has been loosened to a great degree in recent times. Unlike many other central banks, the Bank of Japan decided in April this year to keep low-interest rates in place. Short-term interest rates in the country still sit at -0.1%, which is almost unheard of elsewhere in the world. That arguably has positive effects in other ways, but it’s not great news for the currency. It even appears that the Bank of Japan may stick to this plan no matter what happens to inflation – news which could fill yen investors with horror.
In sum, the Japanese yen has clearly suffered in recent times. The currency has plummeted to its worst performance in 20 years and has lost out mainly to the US dollar – despite its previous status as a “safe haven.” As this article has shown, there has been a whole host of reasons for this – and investors need to make sure they know the reasons why.
Japan’s shares plunged on February 12, following global markets, after a stronger yen against the dollar hurt the country’s big exporters.
Nikkei 225 fell as much as 5.4% in early trade. By the close, the benchmark index had recovered slightly, but was still down 4.85% to 14,952.61 points.
That was below the psychologically important level of 15,000 points and its lowest close since October 2014.
Today’s losses end what has been a turbulent week of trade for Japan.
The index has shed more than 11% over the trading week, which was short because of a public holiday on February 11.
Japan’s big exporters were hurt on February 12 as the dollar fell to a 15-month low against the yen. A stronger yen against the dollar hurts Japan’s exporters, as it makes their products more expensive to purchase overseas.
Auto maker Toyota finished Japan’s trading day down 7%, while Honda lost 5.5% and Nissan shed 5.8%.
Overnight, benchmark indexes in London, the US and Europe posted sharp declines amid continued worries about oil prices and over the strength of the global economy – particularly the outlook for the world’s largest economy, the US.
US Federal Reserve chair Janet Yellen’s gloomy economic assessment on February 10 was continuing to hurt investor sentiment around the world, analysts said.
Janet Yellen said financial conditions in the US had become “less supportive” of growth, dousing hopes of a second rise in interest rates in the near future.
Toyota has announced it is expecting record annual earnings for 2013 as the weaker Japanese yen helps to boost sales abroad.
For the financial year ending March, it expects operating profit to reach 2.4 trillion Japanese yen ($23.7 billion).
The ongoing weakness in the yen also helped Toyota post better-than-expected earnings for the third quarter, with operating profit of 600 billion yen.
That is nearly five times higher than earnings in the same quarter one year ago.
Toyota has announced it is expecting record annual earnings for 2013 as the weaker Japanese yen helps to boost sales abroad
Toyota said in a statement that its revised forecast is due to “progress in our recent profit improvement activities through cost reduction and marketing efforts, in addition to the change in our assumption of foreign exchange rates to reflect the depreciation of the yen.”
The Japanese currency has fallen by around 9% against the US dollar this year.
Toyota sold 9.98 million vehicles during 2013. That’s 270,000 more than its closest rival – US car giant General Motors.
Sales figures helped Toyota retain its position as the world’s largest carmaker by sales for two straight years.
Most Asian markets have fallen again as investors continue to react to news that the Federal Reserve could begin to scale back its stimulus programme.
South Korea’s main index dropped 1.5% while Australia’s lost 0.4%. However, Japan’s Nikkei reversed early losses.
The indexes in Shanghai and Hong Kong were down more than 2% in early trade but pared losses.
On Thursday in the US, the Dow Jones share index fell 2.3% – its biggest drop this year.
The Fed has been trying to support the weak US economy by buying bonds at a rate of $85 billion a month, under a policy known as quantitative easing (QE).
However, on Wednesday, Fed chairman Ben Bernanke said that if the US economy continued to show sign of improvement the central bank could start to slow down its bond purchases as early as this year and end the programme next year.
Most Asian markets have fallen again as investors continue to react to news that the Federal Reserve could begin to scale back its stimulus programme
The excess liquidity in the US has meant a lot of funds have been flowing into emerging markets, especially in Asia.
“Asia has benefited from US capital inflows, partly in relation to QE,” said Mitul Kotecha, from Credit Agricole CIB.
“It has been force-fed with steroids, and now that the steroids are going to be pulled back what will happen is a period of transitional volatility that can continue through summer.”
Currencies in Asia were weak as well against the US dollar, however the weakness in the Japanese yen caused a big reversal in the Nikkei in late trade.
The Nikkei, which had sank more than 2% during the morning trading session, finished 1.7% higher.
A weak yen is good news for Japanese exporters as it makes their goods cheaper overseas and boosts profits that are repatriated back home.
Exporters led the gains with Suzuki Motor jumping nearly 4% and Fast Retailing surging more than 6%.
Asian markets have dropped in early trading after two explosions hit the Boston Marathon finishing line killing three people and injuring dozens more.
Stock indexes fell by as much as 2% in Japan. South Korea and Australia also dropped, as did oil and gold prices.
Earlier on Monday, US markets closed lower after the blasts accelerated a sell-off started by weak economic data.
Analysts said that investors would be more risk averse in coming sessions and would focus on Asia’s problem areas.
“This is a kind of unknown-unknown event and a stark reminder that the world continues to remain unsafe,” said Vishnu Varathan of Japanese bank Mizhuo.
“While it has happened far away from Asia, it is likely to trigger concerns and fears over Asia’s known-unknowns.
“You have the Korean peninsula tensions, the territorial dispute between China and Japan, and other issues in the China Sea which all pose risks if they flare up,” he added.
Asian markets have dropped in early trading after two explosions hit the Boston Marathon finishing line killing three people and injuring dozens more
Faced with these problems, investors reacted to the news of the blasts by trying to cut risks, not least because in recent weeks stock markets in Asia have seen strong gains.
Japan’s Nikkei 225 index was recently trading 1% lower, while South Korea’s Kospi was down 0.9% and Australia’s ASX 200 shed 0.8%.
In the US, all three of the country’s main stock indexes closed lower on Monday. The Dow Jones ended the day down 1.8%, while the S&P shut 2.3% lower and the Nasdaq shed 2.4%.
Oil prices dropped in Asia, with US light crude down by 1.9%, and Brent crude sliding 1.6%. Gold continued to fall, extending Monday’s 10% fall and continuing to hit its lowest levels in two years.
By contrast, the Japanese yen gained against the US dollar because many investors see it as a less risky asset.
“The developments in Boston are likely to trigger an initial reaction of caution,” said Michael McCarthy, chief market analyst at CMC Markets.
The Japanese currency rose as much as 2.5% to 96.61 yen against the US dollar in New York on Monday. It also gained nearly 3% against the euro, rising as high as 125.98 yen against the single European currency.
Analysts said that many large Japanese banks or pension funds tended to sell riskier assets during times of uncertainty, bringing the money back into the country, resulting in an appreciation in the yen’s value.
Knowing this, other global investors also buy the yen, or yen-denominated assets, to benefit from this gain. However, once the risks recede, then investors tended to sell their yen and use the proceeds to again invest in riskier assets.
Analysts said the blasts had further dented investor morale in both Asia and elsewhere, which had already been shaken by weaker-than-expected Chinese and US data.
They also pointed to a number of potential Asian flashpoints that caused investors to be cautious, such as the heightened tensions on the Korean peninsula.
North Korea has recently conducted a nuclear test, and in recent weeks it has also threatened to attack South Korea, Japan and US bases in the region.
Meanwhile, the spat between China and Japan over a set of disputed islands in the East China Sea has flared up. The issue is yet to be resolved and continues to remain a bone of contention between Asia’s two biggest economies.
Analysts have often have warned that an escalation of any of these issues was likely to hurt the region’s economic growth.
“Asia is increasingly relying on intra-regional trade to sustain its economic growth,” said Vishnu Varathan of Mizhuo.
“Any full-blown conflict between Asian nations will hurt trade and could adversely impact economic growth.”
Japan’s stock market has reached its highest level since 2008, after a recent central bank stimulus plan raised hope of economic revival.
The main Nikkei 225 stock index climbed as much as 4.7% to 13,225.62, its highest since August 2008.
The Bank of Japan (BOJ) said on Thursday it would double the country’s money supply to spur growth and halt falling prices.
The step was much bigger than expected and signaled a more aggressive approach towards driving growth.
Analysts said that BOJ moves had got the attention of investors both at home and abroad.
Japan’s stock market has reached its highest level since 2008, after a recent central bank stimulus plan raised hope of economic revival
“Many investors who were not even interested in Japan before have opened their eyes,” said Tetsuro Ii, chief executive of Commons Asset Management.
“They realized that if they continue to look at Japan the way they did before, they are going to lose.”
By pumping more money into the system, Japan is hoping to promote price growth, ending a cycle of deflation, recession and sputtering economic recovery.
At the same time, it is also seen as an attempt to weaken its currency and boost exports.
The Japanese yen has declined 4.5% against the US dollar in the past two days, and more than 5% against the euro.
Analysts said the yen was likely to remain weak in the coming months.
“The big party we are having in the markets now is, of course, the financials. Banks are getting more money for free, utilities with big investment projects are getting zero cost capital now,” said Martin Schulz from Fujitsu Research Institute.
“The big story, and the lasting story, will be the exporters. A weaker yen helps the exporters to earn money with Japanese technology in Asian markets in particular.”
On Thursday, the BOJ embarked on what some are calling a new era of monetary easing.
It will increase its purchase of government bonds by 50tn yen ($520bn; £350bn) annually, the equivalent of almost 10% of Japan’s gross domestic product, or total economic output.
BOJ governor Haruhiko Kuroda defended the size of the stimulus saying the government’s inflation target of 2% would remain out of reach if the central bank continued its incremental steps.
Haruhiko Kuroda said he would “do whatever it takes” to drive growth.
However, analysts say Japan’s new direction is likely to provoke a reaction from their main competitors.
The BOJ’s moves to buy additional bonds is an attempt to keep long-term interest rates low.
The bank hopes that pumping money into the system will make borrowing cheap and encourage consumers and businesses to spend.
The central bank has also said that it would buy riskier assets such as exchange-traded funds and real estate trust funds.
While such moves may help halt years of falling prices, some analysts have warned that there is a risk that so much liquidity in the markets may trigger an artificial rise in asset prices.
“We think there is a risk of a bubble,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
“If these types of asset purchases are going to work, then they work by distorting asset markets.”
However, on Friday Haruhiko Kuroda sought to allay those fears, saying the bank will keep a close eye on the markets.
“I don’t think there’s a bond or stock market bubble now and I don’t see one emerging any time soon,” he told Japan’s lower house of parliament.
Japanese shares have risen after finance ministers of the G20 group of nations avoided singling out Japan for criticism over the recent yen weakness.
The yen has dipped nearly 15% against the US dollar since November amid Japan’s efforts to stoke inflation.
There were concerns that a criticism from G20 may prompt Japan to alter its aggressive stance. The fears were that it would result in the yen rising again and hurt Japan’s plans to spur growth.
Japan’s Nikkei 225 index rose 2%.
Meanwhile, the Japanese currency continued to weaken. It fell 0.6% to 94.12 yen against the US dollar.
It also dipped 0.5% to 125.50 yen against the euro in early Asian trade.
“At the G20 meeting, there wasn’t as much criticism from emerging countries about the recent yen’s weakness as feared. That spurred yen selling,” said Kyoya Okazawa, head of global equities at BNP Paribas.
Japanese shares have risen after finance ministers of the G20 group of nations avoided singling out Japan for criticism over the recent yen weakness
Analysts say the G20 communiqué at the end of its meeting in Moscow on Saturday was an endorsement for Japan’s recent monetary moves.
The policies have seen Japan’s central bank, the Bank of Japan, double its inflation target to 2% in attempt to spur domestic consumption.
The central bank has also expanded a key stimulus measure aimed at keeping long term interest rates low.
Analysts say that as Japan continues to pursue these policies, the yen is likely to weaken further.
“With Japan, as yet, using various measures to ease monetary conditions domestically, we do not expect a large international backlash against its efforts and look for the Japanese yen to continue to decline gradually as the easier monetary conditions feed through,” Barclays Capital said in a note.
A weak yen bodes well for the Japanese exporters and its economy on various fronts.
To begin with, it makes their goods more affordable to foreign buyers. It also helps boost the exporters’ profits when they repatriate their foreign earnings back home.
And as firms see their profits rise, they are likely to have a bigger cash pile to invest in research and development or expansion of their facilities.
Investment in research helps the firms become more competitive as they develop new products. Meanwhile, increased capital investment helps boost Japan’s overall economic growth.
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