Investors typically look at the movement of the yen against the US dollar, but David Walker warns not to overlook the impact of other Asian currencies
Japan’s exporters got what they wanted last month [January] – a sharply falling yen against the US dollar – after Standard & Poor’s downgraded Japan’s credit rating one notch.
However, a number of fund managers and analysts focused on the region are advising investors should pay as much attention to yen cross rates versus currencies of Asian trading partners.
The recent strength of the yen has caused some trouble for Japanese exporters, and the Bank of Japan has recently engaged in the so-called ‘currency wars’ by intervening in FX markets in a bid to make Japanese exports competitive.
Kathy Matsui, co-head of Asia investment research with Goldman Sachs Global Investment Research said the central bank had signaled a willingness to do so again if required.
However, she added, when investors look at Japan, they should not only pay heed to the tender’s strength against the US dollar, which remains the main focal point for many.
“It is not just the dollar yen cross rate you have to be worried about, it is the South Korean won rate,” Matsui told delegates at Goldman Sachs Asset Management’s Global Strategy Conference in London last month.
In late January the yen was 9.4% stronger versus the dollar than 12 months ago, and 5% up against the won.
However managers expect the won to appreciate, after it plunged during the credit crunch as South Korea’s authorities pumped liquidity into its capital markets.
Japanese and South Korean exporters overlap in areas such as shipbuilding, automotives and electronics, Matsui said.
Dede Prabowo, portfolio adviser on Atlantis Investment Management’s Japan Growth and Japan Opportunities funds, added: “More and more Chinese and South Korean companies now make consumer and electronic products that compete with Japanese brands, especially in emerging markets.
“The relative strength of currencies between the three countries has an impact on the pricing of their exports, which affects their market shares.”
She said Japanese companies also increasingly have various goods made in China, so the renminbi cross would also affect their profitability.
Beijing is under pressure chiefly from Washington to devalue its tender against the dollar, which could indirectly boost the competitiveness of Japanese exports versus Chinese rivals.
A growing trend among Japanese firms to produce their exports overseas allows them, to an extent, to obviate problems associated with a strong yen, managers say.
About 68% of listed Japanese manufacturers are engaged to some degree in overseas production, up from 40% in 1990, according to figures supplied by asset manager Chuo Mitsui Asset Trust and Banking. Nearly one fifth of production by these companies is now done outside Japan. (See chart 1)
“This production ratio is expected to continue rising,” said Shigeru Oshita, fund manager at Chuo Mitsui.
Oshita said Japan’s exports to Asia were denominated in roughly equal measure in dollars and yen, but this is changing over time.
“There are ongoing initiatives to switch to the yen in transactions with Asian companies,” Oshita said. “Efforts to reduce dollar exposure are continuing, by offsetting dollar payments for imports with dollar receipts for exports.”
Japan’s total trade with Asia grew from 24% in 1983 to 58% by the start of 2011, although this was partially offset by imports from the region.
“With the ongoing growth in trade with Asia, the rise in Asia’s share of imports/exports and fall in the share of the US is notable,” Oshita said. “As a result, the weight of the US dollar as a settlement currency has fallen.”
However, Atlantis’s Prabowo added some capital goods and many raw materials vital for exports from the region are priced in dollars, “so it is too early to dismiss the importance of the yen / US dollar exchange rate”.
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