A long-term houseguest of ours, who watches too much daytime television aimed too accurately at her age bracket, has developed concerns about the weak yen. When she moved in with us in late 2019, the Japanese currency was sitting comfortably in a narrow exchange rate band against the US dollar that it had occupied for almost three years. Last Friday, after a record-breaking plunge and weeks on the slide, the yen was at a 20-year low.
Analysts see a plausible continuation of the decline into an even deeper historic trough, a rising possibility of intervention by the Japanese authorities to stem that and, because of the fundamental reasons behind the drop (unwavering Bank of Japan policy versus rising US rates), a strong risk such efforts would fail. Intriguingly, our houseguest may — indirectly and through potential machinations of Japan’s $1.6tn state pension fund — provide the braking mechanism.
To a 72-year-old on sofa stake-out, this forex spectacle — when set to semi-scary music and conflated by TV producers with supply chain shocks, rising food and energy prices — is wonderfully watchable stuff. Her rotation through the channels ranges from roundtable debates over Japan’s forex passivity in the face of global turmoil and small businesses declaring impending ruin to celebrities gasping at once-unconscionable price hikes on favourite snacks and cooking ingredients.
Highly resonant among the generation, like her, that was of prime working age when Japan was in its pomp, is the new concern that there isn’t enough concern outside Japan. Such a huge, sudden drop in the currency of a G7 economy would, in the past, have shaken the financial and geopolitical scene. Today, the impact feels much more dulled.
Set against this, both in the repeated statements of the BoJ governor Haruhiko Kuroda and in the notes of equity analysts attempting to rekindle global investor interest in Japanese stocks, are reminders that on balance a weak yen and the significant cost-competitiveness that comes with that are good for corporate Japan. In most cases for the last 30 years, the fretting and intervention by the authorities have happened when the yen has become too strong.
The traditionally cited benefits of a weak yen remain true, even as they are challenged by Japan’s heavy reliance on imported energy and commodities. The yen’s real effective exchange rate is back at levels it last experienced in the 1970s, Japan’s benchmark Topix index is heavy with global manufacturers and, when the country finally reopens to tourists, it will be even more attractive to foreign shoppers and diners than it was when they were last here in early 2020.
But there are two very substantial benefits that receive far less attention.
The first relates to Japan’s increasingly important “not China” status in a less certain and deglobalising world. Where previously the focus of Tokyo bankers and lawyers had been on the outbound dealmaking of corporate Japan, they now report a striking switch. As global industry begins to re-engineer itself away from efficiency and towards security, Japan’s position as a reliable partner, manufacturing hub or supply chain link for US and European businesses has been significantly enhanced. The weak yen, say the bankers, is already tipping investment decisions in favour of Japan, with that trend likely to accelerate.
But the second effect of the yen’s sharp fall this year has been to vindicate the continued commitment of Japan’s Government Pension Investment Fund to its big overseas investment weighting. The millions of pensioners it exists to support may be convinced that the weak yen is making their lives harder. But the GPIF’s roughly 50 per cent portfolio weighting in overseas bonds and stocks now generates what one analyst calculates is a 2-3 per cent performance windfall for a 10 per cent move in the dollar-yen rate. When the GPIF portfolio was rebalanced in 2020, its higher non-Japan allocation was controversial and pointedly not mimicked by the country’s private pension funds. For now at least, circumstances have handed the government technocrats an important victory.
But its importance may yet go further. The difficulty faced by the administration of prime minister Fumio Kishida is that in July he must fight an election on an appeal to voters like our houseguest. Arguments for the benefits of the weak yen may prove futile if the yen is, at that stage, much lower than its current Y130/$ level. Intervention by the Ministry of Finance might, as analysts argue, fail to stop the yen falling. But were the GPIF to even hint that it was considering a rebalancing towards what have now become deeply undervalued Japanese assets, the yen would very quickly find its floor.