USD/YEN back to scary levels
The USD/Yen exchange after a nice pop up in late january this year has been drifting lower for months now. It could be a big issue for the stock market since the Nikkei225 is driven by exporters for the main part.
As you can see in chart below, the USD/Yen after reaching the technical level of 100 last April is now lower than the 95 level and might test again in the coming weeks the 90 level. A recent survey has shown that for Japanese exporters, a 5% drop in the USD/Yen exchange rate has a 3% drop in operating profit in the short term. It might not be that important and it is questionable why the Japanese stock market would drop but there are other issue investors are concerns.
For one what the survey does not show is the loss of contracts. A higher Yen versus USD will have for consequences to lose potential contracts with international companies. Japanese companies would not be able to compete on the pricing. The current economic environment pushes companies around the world to cut cost and look for low cost companies to conduct their projects.
Secondly, if the USD/Yen stays below the 100 level for a long time, Japanese companies will have to close offices in Japan and open others elsewhere to cut production cost and reduce their exposure to USD/Yen exchange rate. It is a simple globalization issue but in an environment like we are today it would be very detrimental to Japan.
The futrue government (probably the DPJ) will have to be very firm toward the need of a stronger dollar. Now will it have to strength and capacity to do it? It is more than likely that the DPJ will have almost no flexibility since the unemployment rate is at the highest in decades and the net government debt has reached 100% versus GDP. The best plan will be to emphasize the need for a stronger domestic economy and let exporters deal with their issue. it is the price to pay for Japan to be more independent vis à vis the other countries.
As you can see in chart below, the USD/Yen after reaching the technical level of 100 last April is now lower than the 95 level and might test again in the coming weeks the 90 level. A recent survey has shown that for Japanese exporters, a 5% drop in the USD/Yen exchange rate has a 3% drop in operating profit in the short term. It might not be that important and it is questionable why the Japanese stock market would drop but there are other issue investors are concerns.
For one what the survey does not show is the loss of contracts. A higher Yen versus USD will have for consequences to lose potential contracts with international companies. Japanese companies would not be able to compete on the pricing. The current economic environment pushes companies around the world to cut cost and look for low cost companies to conduct their projects.
Secondly, if the USD/Yen stays below the 100 level for a long time, Japanese companies will have to close offices in Japan and open others elsewhere to cut production cost and reduce their exposure to USD/Yen exchange rate. It is a simple globalization issue but in an environment like we are today it would be very detrimental to Japan.
The futrue government (probably the DPJ) will have to be very firm toward the need of a stronger dollar. Now will it have to strength and capacity to do it? It is more than likely that the DPJ will have almost no flexibility since the unemployment rate is at the highest in decades and the net government debt has reached 100% versus GDP. The best plan will be to emphasize the need for a stronger domestic economy and let exporters deal with their issue. it is the price to pay for Japan to be more independent vis à vis the other countries.
