DSIJ Mindshare

PLUMMETING YEN PUNCHES JAPANESE ECONOMY

Over the last one year the currency of the world’s fourth-largest developed economy, Japan, has depreciated by more than 13 per cent on account of Bank of Japan’s aggressive Quantitative Easing (QE). This led to currency weakness and converted the long-trade surplus into long-standing deficits as increasing energy import bloated the energy bill after 48 nuclear reactors closed down in the wake of the Fukushima disaster in 2011. However, corporate Japan is relishing a weaker Yen as companies are repatriating more profits and a sharp increase in corporate earnings. But though corporate profits have risen tremendously, no impact was seen on the wage rate which fell sharply in 2014, thereby reducing the consumption of consumers. As a result of this, domestic demand has taken a hit, thereby forcing the exporters to shift production abroad to be closer to demand.

In order to lift the country’s stagnating economy from its deflationary uneasiness, Japan’s Prime Minister Shinzo Abe has long been following his much proclaimed ‘Abenomics’ formula which combines fiscal expansion, monetary easing and structural reform so as to induce private investments and spur growth. The fiscal stimulus aims at increasing government spending to kick-start Japan’s struggling economy. Since 2012, there has been a drastic increase in government spending but it has not helped much as massive increase in external debt nullified the positive effects. The spending was mostly focused on infrastructure construction that boosted investment in new housing. However, low level of government spending on public works has resulted in a sharp decline in the construction industry since 2014. In its recent budget planning, the government has assured that it will start to address its huge debt by borrowing less money even as it spent more.

To inject liquidity into the economy, Bank of Japan in 2013 planned to start off a new round of QE which they had pioneered in early 2000. Although this stimulus has doubled its balance-sheet, it couldn’t spur the country’s inflation and GDP, as a result of which Bank of Japan announced further expansion of Yen 80 trillion per year once again on October 31,2014. The bond buying programme had dual effects on the sluggish Japanese economy. On the one hand, corporate earnings and business confidence in Japan improved, paving way for more business investment opportunities while on the other hand, the pace at which the Yen weakened turned out to be dreadful for small businesses as a result of which they preferred to increase their margins by moving their factories offshore, thus resulting in a sharp decline in industrial production and FDI.

Another catch in the sluggish economic story of Japan was the increase in Japan’s sales tax in April 2014 from the previous 5 per cent to the current 8 per cent so as to reduce the government’s debt burden. In the process this ended up distorting Japan’s encouraging economy. This move has hampered the earnings of various corporates who in turn passed the burden on to the consumers. Core consumer prices increased to their highest level early in 2014, resulting in a sharp decline in consumer spending whereas retail sales were hit, thereby affecting the profits of the companies. A vicious circle was thus formed that resulted in GDP contraction. Also, the much hyped QE and commitment to keep the interest rate near zero for “a considerable time” caused jitters across the global markets, leading the DX to surge to multi-year highs.

Current Scenario

In its latest meeting, the Bank of Japan ignored calls for more stimulus, stating that the world’s number three economy grew more than expected in the first quarter and kept its annual Yen 80 trillion (USD 882 billion) monetary easing programme in place after a two-day meeting. However, it added that it will continue with QE as long as it achieves the price stability target of 2 per cent. This has become tough off late as decline in global energy prices has led to a staggering CPI at around 0 per cent which has been passed off as temporary by the BoJ. The other positive factor has been the recent Mediterranean crisis where Greece’s reluctance to repay its international creditors on account of insufficient monetary resources has increased the chances of a major default.

Further, Greek Prime Minister Alexis Tsipras stated that unless foreign lenders provide more aid, Athens won’t be able to make payment of Euro 300 million to the IMF on June 5. This has made the global markets wary and in turn supported the safe haven demand. Moreover, consistent weakness seen in the US’ economy after a string of weak data has raised expectations of delay in interest rate hike by the Federal Reserve.

Strategy: Sell NSE JPYINR between Rs 53.30 – 53.50, SL – Rs 54.20, Target – Rs 51.80 (CMP – Rs 52.90)

Disclaimer: The above opinion is that of the author and is for reference only.


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