LONDON: The yen could be in for a sustained period of weakness against the dollar after a top Japanese policymakers effectively painted its recent slide as “payback time” after years of painful strength.
Finance Minister Taro Aso’s recent comment that Japan “endured without complaining” when the yen strengthened following the global financial crisis in 2008 perhaps indicated that Tokyo will be asking others to see the yen’s move as a necessary adjustment to a multi-year rise.
Having broken through option barriers at 93.00 yen, dollar/yen may now be attracted in coming days to a large cluster of similar structures at 94.00 and then at 95.00 yen.
Japanese policymakers seem happy with the trend, portraying yen weakness as a consequence of policies adopted to defeat deflation and not a policy goal in itself.
“We have launched policies aimed at ending deflation. As a result...the yen has weakened,” Aso said. “(The yen weakness) is not the goal, the goal is to beat deflation,” he said
Aso was probably setting out the government’s stall before a Feb. 15-16 meeting of the G20 group of major economies (G20) in Moscow at which Japan may be fearing some criticism of its policies.
It may be worth noting that Russia’s top financial diplomat told Reuters recently that the G20 should focus on commitments to curb borrowing rather than criticizing Japan.
The fact that the slide in the yen’s value has not yet shown up in materially improved financial results from Japan’s exporters also argues, from a Japanese standpoint, for the need for the yen’s weakness to be sustained.
Japanese exporters need the yen’s weakness to be more than a transitory interruption of a strengthening in the currency.
Currency hedging cost Japanese companies such as Honda Motor Co. the chance to fully cash in on a weak yen last quarter.
Honda booked an unrealized loss on currency derivatives of 54.5 billion yen ($ 598.5 million) in the fourth quarter, mostly in currency products.
Honda’s chief financial officer Fumihiko Ike said the company hedged currency trades three months ahead, a common practice among Japanese exporters that means their fourth quarter sales were booked at yen levels near a record high.
It may be that other Japanese exporters, not used to seeing the yen slide hard and fast, also did a lot of their yen buying to hedge their overseas revenues, early in the fourth quarter of 2012, and thus missed much of the yen’s slide at year end.
Noticeably, while the cheaper yen is likely to start filtering through to bottom lines from the January-March quarter, many Japanese companies remain cautious about earnings.
Those companies will hope the yen’s weakness is sustained and, judging by the tone of comments coming from Japanese policymakers, they may get their wish.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
