In recent financial developments, the Japanese yen has been on a downward trajectory, reaching an 11-month low of ¥148.3 against the US dollar. This decline has been so significant that it prompted verbal intervention from Japanese authorities, igniting market speculation about potential direct action if the yen's descent continues at its current pace.
On a particular Friday afternoon last month, shortly after the Bank of Japan signaled its intention to maintain its ultra-loose monetary policy, shares of three of Japan's most renowned corporate entities-Toyota, Honda, and construction machinery behemoth Komatsu-closed at all-time highs. Notably, even during the 1980s economic bubble, these companies had not achieved such stock valuations. Market analysts have linked this surge in stock prices directly to the yen's weakening position.
The yen's decline has traditionally been beneficial for export giants like Toyota, Honda, and Komatsu. When the yen falls, the earnings of such Japanese companies typically rise, a trend that has been observed for years. This correlation explains why the exporter-heavy Nikkei 225 stock average has surged by 27% since the beginning of the year, outpacing the Dow Jones and S&P 500 indices in the US.
However, the market's enthusiasm isn't solely confined to these export giants. Nichirei, a major player in the frozen food and refrigerated warehouse sector, also witnessed its shares reaching an all-time high. The reason for this surge is twofold. Firstly, the weakening yen has made imports more expensive, given that Japan imports about 60% of its food and 94% of its energy. With the yen's decline, these imports have become pricier. Secondly, as the cost of living rises, Japanese households, accustomed to stable or decreasing prices, might opt for more economical options like frozen food, boosting companies like Nichirei.
Kazuo Ueda, the newly appointed governor of the Bank of Japan, recently highlighted a shift in corporate behavior, noting an increase in inflation expectations. He observed that while companies previously found it challenging to raise prices, the current trend sees more businesses hiking their prices, with others following suit. This change is monumental for Japan, a country that hasn't experienced significant inflation in years.
As inflation expectations become more entrenched in the financial planning of Japanese households, there's a growing sentiment that they will seek ways to hedge against it. One likely strategy is to search for yield, potentially in the higher-yielding dollar. If Japanese households begin reallocating their assets out of cash, it could further weaken the yen.
