An aging population struggling with the spectacle of the falling yen
One of our long-time guests, who watches too much TV during the day and too narrowly targets her age group, expressed concern about the weakness of the yen. When it moved in with us at the end of 2019, the Japanese currency was comfortably settled in a narrow exchange rate band against the US dollar that it had occupied for nearly three years. Last Friday, after a record drop and weeks of decline, the yen was at its lowest in 20 years.
Analysts see a plausible continuation of the decline to an even deeper all-time low, a growing possibility of intervention by the Japanese authorities to stem this decline and, due to the fundamental reasons for the decline (Bank of Japan’s unwavering policy against rising rates), a strong risk that these efforts will fail. Curiously, our guest may – indirectly and through potential machinations of Japan’s $1.6 billion state pension fund – provide the braking mechanism.
For a 72-year-old man on a couch, this forex spectacle – when tuned to semi-scary music and confused by TV producers with supply chain shocks, rising food prices and energy – is a wonderfully watchable thing. His rotation through the channels ranges from roundtable debates about Japan’s passivity in the face of global turmoil and small businesses declaring their impending doom to celebrities gasping for both unreasonable price hikes on favorite snacks and cooking ingredients. .
Very resonant among the generation, like her, who was of working age when Japan was at its peak, is the new concern that there is not enough concern outside of Japan. Such a large and sudden drop in the currency of a G7 economy would have rocked the financial and geopolitical scene in the past. Today, the impact seems much duller.
Alongside this, both in BoJ Governor Haruhiko Kuroda’s repeated statements and in the notes of equity analysts trying to rekindle global investors’ interest in Japanese equities, are reminders that, in the together, a weak yen and the consequent strong cost competitiveness are good for Japanese companies. In most cases over the past 30 years, concern and intervention from the authorities have occurred when the yen has become too strong.
The traditionally cited benefits of a weak yen hold true, even if challenged by Japan’s heavy reliance on imported energy and raw materials. The yen’s real effective exchange rate is back to levels it last saw in the 1970s, Japan’s Topix benchmark is heavy with global manufacturers and, when the country finally reopens to tourists , it will be even more attractive to foreign buyers and diners than it was when they last visited here in early 2020.
But there are two very substantial benefits that receive much less attention.
The first concerns Japan’s increasingly important “non-Chinese” status in a less secure and deglobalized world. Where previously Tokyo’s bankers and lawyers focused on Japanese companies’ outbound transactions, they are now signaling a stark change. As global industry begins to reorient itself from efficiency to safety, Japan’s position as a reliable partner, manufacturing hub or supply chain link for American and European companies has grown. considerably strengthened. The weak yen, bankers say, is already tilting investment decisions in favor of Japan, and that trend is set to accelerate.
But the second effect of the yen’s sharp fall this year has been to justify the Japanese government’s Pension Investment Fund’s continued commitment to its heavy weighting of overseas investments. The millions of retirees it exists to support may be convinced that the weak yen is making their lives more difficult. But the roughly 50% weighting of the GPIF portfolio in foreign bonds and equities now generates what one analyst calculates as a 2-3% performance windfall for a 10% change in the dollar-yen rate. When the GPIF portfolio was rebalanced in 2020, its higher allocation outside of Japan was controversial and clearly has not been emulated by the country’s private pension funds. For now at least, circumstances have offered the government technocrats an important victory.
But its importance can go even further. The difficulty faced by the administration of Prime Minister Fumio Kishida is that in July he has to fight an election following a call for voters as our guest. Arguments for the benefits of a weak Yen may prove futile if the Yen is, at this point, well below its current level of 130 Yen/$. The intervention of the Ministry of Finance may, as analysts argue, not prevent the fall of the yen. But if the GPIF hinted that it was considering a rebalancing towards now deeply undervalued Japanese assets, the yen would bottom out very quickly.