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Explainer-What are the consequences of the yen’s fall to a 24-year low?

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© Reuters. FILE PHOTO: A Japan yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration/

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By Saikat Chatterjee

LONDON (Reuters) – The Japanese yen fell past the psychological 135 line to levels against the U.S. dollar last seen in October 1998.

The scale of the move has repercussions for the domestic economy as yen-based import prices are surging at a record annual pace, heaping pressure on household balance sheets.

The Bank of Japan and the Japanese government on Friday gave a rare joint statement that they may intervene if weakness persists.

So far the fallout from the weakening yen has been minimal for broader financial markets, but that could change if the sell-off accelerates.

Below are key questions about what a sliding yen means for Japan’s economy and international markets:

WHY IS THE YEN WEAK?

The yen, the third most-traded currency globally, fell as low as 135.22 yen after starting 2022 at 115. With the dollar up more than 16% so far this year, the yen is on track for its biggest annual drop since 2013.

The weakness primarily stems from widening interest rate differentials between Japan and elsewhere.

While the rest of the world, led by the U.S. Federal Reserve, is raising rates aggressively to tame soaring inflation, the BOJ has doubled down on its easy policy stance.

The gap between Japanese 10-year government bond yields and those in the United States is 293 basis points — a near 3-1/2-year high — while the gap with German yields is at 8-year highs.

WILL AUTHORITIES INTERVENE?

They certainly say they might.

On Friday, Japan’s government and central bank said they were concerned by the recent sharp falls, the strongest warning to date that Tokyo could intervene.

The yen quickly bounced away from its two-decade lows, but not everyone is convinced actual intervention is likely.

Given the economy’s reliance on exports, Japan has historically focused on arresting sharp yen rises and taken a hands-off approach to yen weakness, which is more difficult because yen-buying requires Japan to draw on limited foreign reserves.

The last time Japan intervened to support its currency was 1998, when the Asian financial crisis triggered rapid capital outflows from the region. Before that, Tokyo intervened to counter yen falls in 1991-1992.

Currency intervention is costly and could easily fail given the difficulty of influencing the yen’s value in global foreign exchange markets.

WHAT CAN STOP THE DECLINE?

A marked improvement in growth prospects as the country reopens its borders post-COVID and higher inflation could alter the BOJ’s dovish stance.

Japan’s core consumer prices in April were 2.1% higher than a year earlier, exceeding the BOJ’s 2% inflation target for the first time in seven years.

“The yen’s fall could stop if the BOJ changes tack and becomes hawkish,” said Francesca Fornasari, head of currency solutions at Insight Investments.

Any sign that rates outside of Japan are peaking might also prompt a relief rally. There are no signs of that yet though, with U.S. rates set to peak at 3.5% in mid-2023, according to futures markets.

DOES A WEAKER YEN BOOST THE ECONOMY?

The yen has weakened back towards recent 7-year lows versus the Chinese yuan and is hitting new multi-year lows against the Korean won and the Taiwanese dollar, which should provide some relief for Japan’s widening trade deficit.

Some like John Vail, chief global strategist at Nikko Asset Management, say currency weakness is crucial for Japan’s economy to maintain its competitiveness as a secure source of supply-chain diversification.

The yen’s decline also boosts the attractiveness of its stock market among foreign investors who consider it undervalued versus European and U.S. markets. Japanese stocks have outperformed rivals in 2022, although they are still down as investors globally dump riskier assets.

WHAT DOES IT MEAN FOR FX MARKETS?

The yen has long been the currency of choice for investors undertaking so-called carry trades, which involve borrowing in a low-yielding currency like the yen to invest in higher yielding currencies like U.S. or Canadian dollars.

A strategy borrowing in yen and investing in an equal basket of U.S., Australian and Canadian dollars would have yielded more than 13% so far in 2022, according to Refinitiv data.

But the speed of the yen’s drop and questions about policymaker intervention is fuelling unease among investors, especially with short bets against the yen near six-month highs.

Further volatility and weakness could undermine its appeal as a funding currency.

WHAT ABOUT DOMESTIC INVESTORS?

The yen’s weakness puts Japanese investors in a bind.

Yields are high and rising, which makes foreign bonds much more attractive. But that also means the cost of FX hedging is climbing.

So Japanese investors can often only capture the higher yields if they buy foreign bonds unhedged.

But with the yen at such depressed levels it is difficult for investors to stomach such currency risk, such as the yen appreciating. Even a modest move back to 115-120, where we were 4 months ago, would eat up years worth of yield advantage.

GRAPHIC: Japan currency (https://fingfx.thomsonreuters.com/gfx/mkt/myvmnwzrlpr/G10%20FX%20performance%20YTD.JPG)

GRAPHIC: BOJ and JP CPI (https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrnbyjpm/BOJ%20and%20JP%20CPI.JPG)

Economy

South Korean exports dropped 14% in November, the highest in 2.5 years

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South Korea’s exports fell 14 percent year-on-year to $51.91 billion in November, preliminary data from the Ministry of Commerce, Industry and Energy showed. The November drop was the biggest in 2.5 years since May 2020 and was caused both by the deteriorating global economy, which even a Google price chart showed, and a truckers’ strike in the country.

South Korea exports 2022 – reasons for the drop

Exports fell for the second month in a row. Analysts on average expected an 11% decline, according to Trading Economics. Respondents to MarketWatch predicted a 10.5% decline.

Shipments of semiconductor products overseas, the country’s top export item, fell 29.8%; petrochemicals fell 26.5% and steel exports fell 10.6%. Meanwhile, exports of automobiles jumped 31% and petroleum products 26%.

Exports to China, South Korea’s largest trading partner, fell by 25.5%, and to Asian countries – by 13.9%. Below, supplies to the USA grew by 8% and to the European Union – by 0.1%.

In January-November exports rose by 7.8% on the same period last year and reached a record $629.1 billion.

South Korean imports rose 2.7% to $59.2 billion in November, marking the 23rd consecutive month of gains, but the current rate of growth is the lowest since November 2020. Experts had predicted an increase of only 0.2%.

South Korea’s trade deficit last month was $7.01 billion, compared with a surplus of $2,973 billion a year earlier.

The negative balance was recorded for the eighth month in a row. As a result, by the end of 2022, the country may record a foreign trade deficit for the first time since the financial crisis in 2008.

Earlier we reported that the UN estimates the cost of humanitarian aid in 2023 at a record $51 billion.

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Economy

The UN estimates humanitarian aid costs in 2023 at a record $51 billion because of an impending humanitarian crisis

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Joint humanitarian operations will require a record $51.5 billion in 2023 to address urgent problems.

The UN Office for the OCHA estimates that 339 million people will need urgent aid in 2023. At the same time, OCHA called on donor countries to provide funds for assistance in 2023 to the 230 million people most in need, living in 68 countries.

Griffiths explained that aid is needed not only for people experiencing conflicts and disease outbreaks. but also for those suffering the effects of climate change, such as people in peninsular Somalia facing drought and those in Pakistan experiencing severe flooding. For the first time, the growing humanitarian crisis has brought the number of displaced people worldwide to the 100 million mark. Also worsening an already bad situation is the worldwide coronavirus pandemic, which affects the poor. Note that the general economic crisis has begun to negatively affect even the Netflix price chart.

Earlier we reported that house prices in the UK fell by 1.4% in November.

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Economy

Average house prices in the UK fell 1.4% in November

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Average house prices in the UK fell 1.4% in the previous month in November to 263,788 thousand pounds (about $319,000), according to the British mortgage company Nationwide Building Society.

The decline was recorded at the end of the second consecutive month and was the most significant in almost 2.5 years – since June 2020. Analysts on average had forecast a decline of only 0.3%, according to Trading Economics.

Are house prices in the UK going to fall even more?

Residential real estate prices in November compared to the same month last year increased by 4.4%. At the same time, experts expected a larger increase of 5.8%. The growth rate slowed down significantly compared with 7.2% in October. Because of the difficult economic situation, British investors are investing in other instruments. The Microsoft price chart, for example, is showing potential for growth, so many are interested in the U.S. stock market. 

“The market looks set to remain under pressure in the coming quarters. Inflation will remain high for some time, and interest rates are likely to continue to rise,” believes Nationwide Senior Economist Robert Gardner. – The outlook is unclear, and much will depend on how the overall economy behaves, but a relatively soft landing is still possible.”

Earlier we reported that Sanctions Circumvention was included in the EU’s list of criminal offenses.

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