From being a lost Samurai, the currency Japanese Yen (JPY) has now become a Super SaYEN. Didn’t get it right? No problem, leave the manga series behind and let’s get into Finance with us….

So, the JPY has been a depreciating currency for decades now. To understand it better, take a look on a below timeline of Economic History of Japan.

1980s Booming Economy- Rise in stock markets & Real Estate, huge loan borrowings by individuals & corporations because of low interest rates, Technological Revolution- Rise of Electronic Gadgets and Video gaming, Animation Industry- Manga and Anime popularity, J-Pop Music, Fashion, etc.

1990 The Lost Decade- Asset Price Bubble burst due to high debt crisis and Stock Market Crash led to increase in the interest rates by Bank of Japan. Due to inflation, wages deteriorated & consumer spending were dropped, Prices of goods and services also dropped.

2011- Earthquake and Tsunami

2012 Printing Money- Following Deflation in the country, Central Bank cut the interest rates to zero and started printing more money to increase spending and consumption. Despite these efforts, achieving a stable inflation rate of around 2% had been challenging.

Till date- Due to low birth rates and ageing population throughout a decade, people of Japan have spent less money and saved more. Plenty of money in the banks & Low cost borrowings were meant to boost the economy but with more circulation of money, Yen lost its value.

To seek better returns, the Japanese Investors started investing their money outside of Japan and decrease in demand for Yen, made the currency weak against stronger currencies such as USD & EURO. By the mid of 2024, JPY had hit 34-year low against USD (30-06-2024 USDJPY 160.883).

Then what changed in recent days?

On 31^st July, 2024, the Bank of Japan at its July 2024 meeting raised its key short-term interest rate to around 0.25% from the prior range of 0 to 0.1% from 1999 till March, 2024. This move by the Central Bank was to restrain the Yen depreciating against USD, promote the growth of its economy and stimulate inflation. It also announced tapering Government’s Bond purchase into half by 2026 first quarter.

But, the rise in the interest rate didn’t go well in Tokyo as Nikkei Index was down 5-6% post announcement. Other Asian markets such as Hang Seng fell 2.1%, South Korea KOSPI fell 3.7%, Shanghai Composite 0.9% and Australia’s ASX fell 2.1%. Two days after the hike, weekly trend showed USD weakened by 3.61% (02-08-2024 USDJPY 149.071) and EURO by 3.73% against JPY. Japan’s Export oriented giants: Fast Retailing, Sony Group, Toyota Motor, Daikin Industries, etc. shares suffered from appreciation of JPY which can reduce the overseas earnings.

Typically Japan runs a trade surplus, thanks to its strong export sector, particularly in automobiles, electronics, and machinery. It also has a sizable current account surplus, reflecting net income from overseas investments. And so far, the JPY has been volatile while depreciating and losing its value but now it has turned to be more volatile while appreciating and gaining power creating problems to the giants.

What happens in India?

India and Japan have a robust and evolving trade relationship characterized by strategic cooperation, economic partnerships, and mutual interests. The trade between both the countries has been growing steadily. Major exports from India to Japan include petroleum products, chemicals, textiles, and seafood, while Japan exports machinery, electronics, iron and steel products, and auto components to India.

Japan is one of the largest foreign investors in India. It also holds one of the largest foreign exchange reserves in the world. Japanese companies have significant investments in various sectors such as automobiles, electronics, infrastructure, and pharmaceuticals. Major Japanese firms like Suzuki, Honda, and Sony have a substantial presence in India. It has been actively involved in key projects that include the Delhi-Mumbai Industrial Corridor (DMIC), Chennai-Bangalore Industrial Corridor, and the Mumbai-Ahmedabad High-Speed Rail project (bullet train).

India has been borrowing in JPY for several strategic and financial reasons. A depreciating JPY created a golden opportunity for India as Japan has maintained low interest rates for an extended period, making borrowing in Yen relatively cheaper compared to other currencies. In the last one year, Indian Companies such as HUDCO, REC, NTPC, JSW Steel and many more raised approx. JPY 230 billion and again in February, 2024, the Government of Japan committed Official Development Assistance Loan of JPY 232 billion for nine development projects in India.

Impact of appreciation of JPY

Imports from Japan has been relatively cheaper due to depreciating JPY against INR. In contrast to other currencies, financing these imports by discounting the JPY bills attracted many Importers as funding in JPY are linked to TIBOR (Tokyo Interbank Offered Rate) which were just below 0.38% for a one year loan before Interest Rate Hike on 31^st July, 2024.

The above table shows how the Import financing in JPY is cheaper than funding in other currencies like the USD and how India took advantage of low interest costs. But, with great benefits also comes some limitations that most of the Importers/Traders/Investors are unaware of:

For example: For a 1 year term, an importer may enter into a derivative contract by hedging JPYINR in OTC market to protect against excessive losses due to currency fluctuations in future. Hedging also comes with a limitation as the Hedge cost vary across currency pairs and can look expensive as shown below:

Carry Trade

Carry Trade is a vastly popular trading strategy where a borrower/investor borrows from a country having lower interest rates and weaker currency say for eg. JPY and then investing the money in assets like equities, bonds & commodities of other country that give high rate of returns. Such strategies also have disadvantages of currency fluctuations, conversion & hedging costs as mentioned above.

Due to weak JPY and lower interest rates so far, Yen Carry Trades were more convenient for the traders. As of 30^th June, 2024 the Foreign Portfolio Investors Assets Under Custody (FPI AUC) of Japan was Rs. 2,05,702 crores only in equities. The FPIs from USA were at the highest.

It can be a troublesome situation for both investors & borrowers now as the interest rates have risen and JPY is becoming stronger. For the borrowers buying in JPY shall be more expensive and for the investors, worldwide tension such as Recession Fear in the US, BOJ monetary policy, & Iran-Israel War can have an impact on their returns. Amid such global cues, Sensex and Nifty were in deep red on 05^th August’s Monday morning.

Conclusion

By now as the Interest rate was hiked by the Bank of Japan, JPY has appreciated in its value, Hedging cost of JPYINR has high potential of further increase and as of 02-08-2024 one year TIBOR has crossed 0.53% mark. In such event when JPY appreciates against INR, both the Indian Businesses and Government will have to reevaluate these rising costs on their JPY loans.  

In regards to the famous Japanese Manga Series, we can say that Bank of Japan has unleashed its powers and its currency has now become Super SaYEN!!

References:

https://www.marketbrew.in/daily-insights/depreciating-japanese-yen-benefit-india

https://finshots.in/archive/why-is-india-borrowing-in-japanese-yen/

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https://www.mofa.go.jp/region/asia-paci/india/data.html

https://www.livemint.com/market/stock-market-news/japans-yen-fell-to-34-year-low-heres-how-it-will-affect-indian-stocks-11712055280808.html

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https://pib.gov.in/PressReleasePage.aspx?PRID=2007319

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