Japan stocks: weak yen no longer boosts economy via manufacturing

News

The yen is making history, but in a bad way. Tuesday marks the 13th straight day Japan’s currency fell against the dollar. It is the currency’s longest losing streak in at least five decades. Record short bets on the yen normally mean a boost for local exporters. They now spell trouble.

The yen has hit a low of 128 per dollar, down 16 per cent in the past year. The once-mighty Japanese currency is weaker than it has been for two decades, despite government warnings intended to stem the slide.

Traders have reason to ignore these. The gap between policy in the US and Japan is widening. Federal Reserve boss Jay Powell is expected to accelerate rate rises. Japan’s central bank governor Haruhiko Kuroda has been unwaveringly dovish.

Historically, Japanese equities benefit from a weak yen. This boosts big exporters such as Toyota, Hitachi, Sony and Honda. Such companies have traditionally invoiced in dollars, not just for sales to the US but within Asia. A high greenback boosts their spending power at home.

This explains why the Bank of Japan has not intervened directly to support a weaker yen in more than two decades, relying on verbal warnings instead.

But over the past decade, Japanese companies have set up more offshore production sites, partly to hedge currency fluctuations. In February, Toyota’s overseas production accounted for more than half of group production. That limits the boost a weaker yen can give via overseas sales, which account for four-fifths of Toyota’s total.

At the same time, rising domestic prices are putting the bite on corporate Japan. Core inflation hit a two-year high in Tokyo in March. This is bad for local consumption, which accounts for 50 per cent of the economy. Any boost to exports, which now account for only about 15 per cent of Japan’s economy, would hardly compensate.

Manufacturers have the tricky job of trying to pass on soaring input prices for commodities with disrupted supply chains. These include nickel, palladium and silicon chips.

Japan’s benchmark Topix, which is down 5 per cent this year, has reacted sensitively and negatively to hawkish signals from the Fed in recent months. As the US tightens monetary policy, equity investors in Japan must adjust to a new normal where a weaker yen no longer underpins blue-chip stocks.

The Lex team is interested in hearing more from readers. Please tell us what you think of the weak yen in the comments section below

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