It seems that the Japanese really do love giving out surprises! Earlier today, Japan’s Economy Minister Akira Amari shocked the markets with some unusual comments on exchange rates.
According to him, much of the yen’s strength that we saw last year has been corrected. However, further weakness in the currency could soon become a threat to the economy!
His remarks follow USD/JPY‘s surge to 4-year highs, after the release of better-than-expected U.S. data and rising bond yields. What makes the statement even more odd is that in the week prior, G-7 Finance Officials actually indirectly affirmed the BOJ’s ultra-loose monetary policy.
Since BOJ Governor Haruhiko Kuroda was appointed into office by Japanese Prime Minister Shinzo Abe, the BOJ has become keen on boosting the economy and weakening the yen. The bank has launched aggressive measures to ease monetary policy. This has then led the yen to drop to multi-year lows against some of its counterparts.
Now that USD/JPY has risen above the major 100.00 psychological level, could Japan really have had enough?
Some companies would wish against that! Export-dependent businesses are now reaping the benefits of a weaker yen as their products become cheaper relative to those of their counterparts. For instance, Sony reported its first annual profit in five years. Toyota also booked massive earnings for the fiscal year ending in March, which translates to more than triple its profits in the year prior.
Not only that! Analysts also attribute around half of the 3.5% growth rate that Japan posted for the first quarter of the year to the weaker yen.
So why is Minister Amari so worried?
Remember young padawan, there are always two sides to every coin. Japanese Economy Minister Amari’s concern reflects the consequences of the massive yen weakness to other sectors of the economy. While a cheap yen is beneficial to export-oriented businesses, it takes its toll on those that have to import their materials as they would need more yen to acquire their materials outside of the country.
Steel-makers have been particularly hit hard by the decline in the currency’s value. They suffered a 62% drop in profits as importing iron ore and coal became more costly. Japan’s 10 major power companies, which depend on importing fuel in order to operate their thermal plants, reported a 13 trillion JPY drop in their current account from the previous business year.
Consequently, the ripple effect of the weaker yen is already being seen in the rising gasoline, flour, and paper prices in Japan. Some analysts are worried that it won’t take long until the cheap yen would lead to a significant decline in consumer spending and employment in sectors outside of exports. Yikes!
What do you think? Has the BOJ seen enough yen weakness or will we see the yen sell off further in the coming months?