In the foreign exchange market, the depreciation of the yen accelerated again. The yen exchange rate fell to more than 133 yen per dollar at one point. In more than 3 months, the yen has depreciated by more than 18 yen. However, compared with the rapid depreciation of the yen in the past, the Nikkei average rose slowly. Shares in sectors such as autos, which benefited greatly from the yen’s depreciation, were sluggish. The reason is that the supply constraints are still ongoing, the benefits brought by the depreciation of the yen are limited, and the depreciation of the yen has led to high raw material prices, which has become a negative factor for some stocks. The question of the limited effect of the yen’s depreciation has surfaced.
In the foreign exchange market, only the yen has depreciated. On June 7, the exchange rate of the yen against the US dollar fell by more than 2 yen from the previous day, hitting the lowest level in 20 years since 2002. On the same day, the exchange rate of the yen against the euro also fell to 142.0-142.4 yen per euro, the lowest value in about seven and a half years.
The background reason for the re-emergence of the yen sell-off is that the interest rate gap between Japan and Europe and the United States has further widened. The European Central Bank (ECB) is also expected to raise interest rates at its June 9 meeting, following the US Federal Reserve (FRB), which moved quickly to raise interest rates. European Central Bank President Christine Lagarde said in late May that “a rate hike in July is likely” and hinted that the negative interest rate policy would end by the end of September.
There is a view that the Swiss National Bank (Central Bank) will also raise the policy rate from -0.75% to around -0.5% at its June 16 meeting. Inflation forces the central bank to tighten monetary policy.
But only the Bank of Japan insisted on continuing its massive monetary easing. Bank of Japan Governor Haruhiko Kuroda re-emphasized at the meeting of the Senate Finance Committee on June 7: “We will continue to adhere to the strong monetary easing policy centered on the current yield curve control (Yield Curve Control) measures.” The sell-off in the yen triggered by monetary easing continues.
Compared with the past, this time is characterized by a weakening of the buying momentum of stocks due to the depreciation of the yen in the stock market. Although the yen depreciated by more than 2 yen in 1 day, the Nikkei average on June 7 was 27943 points, up only 28 points from the previous day.
At the end of February, the yen began to depreciate from above 114 yen per dollar, and by June 7, the yen had lost 14% against the dollar. The Nikkei average rose just 5%. The auto sector, which represents the export sector, fell 3 percent, while the machinery sector rose just 4 percent.
In the past, under the depreciation of the yen, the export industry played an important role in pulling the stock market up. Before Abenomics, from the end of October 2012 to the end of May 2013, the yen depreciated from around 80 yen per dollar to more than 100 yen per dollar, the automotive sector rose 68%, and the machinery sector also rose 58%.
This time around, if some sectors such as oil (up 29%) are not included, there are no sectors that have played an important role in pulling. Compared to the end of February, the food sector was down 7% and the retail sector was down 2%. The market is concerned that the rise in raw material prices caused by the depreciation of the yen cannot be fully passed on, restraining the rise of stock prices.
Many views point out that the depreciation of the yen will bring less benefits to Japanese companies. Daiwa Securities conducted an analysis of about 200 major companies, and the results showed that when the yen depreciated by 1 yen against the dollar, the rate of boosting current profits was 0.98% in 2009 and 0.6-0.7% in 2012. But it dropped to 0.43% in 2021. The reason, said Kenji Abe, chief strategist at Daiwa Securities, is that “Japanese companies have long been taking measures to reduce exchange rate risk.” An important factor is changes in the industrial structure, such as the relocation of manufacturing plants overseas.
The supply chain problems caused by the crisis in Ukraine and the new crown epidemic have not been solved, and even if the yen continues to depreciate, it is difficult for exports to increase rapidly.
Takashi Ikeda, senior portfolio manager of Japan’s GCI Asset Management Company, pointed out: “Some domestic demand companies cannot pass on import costs to prices. If the depreciation of the yen intensifies, the negative effects will become more and more obvious.” Whether the depreciation of the yen is good or bad for Japanese companies, it may be difficult to draw a conclusion.