Yen slide and oil rise seen as toxic cocktail for Japan’s recovery

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TOKYO, Oct 12 (Businesshala) – The COVID-19 pandemic is threatening to halt Japan’s fragile economic recovery by making rising commodities even more expensive, with the yen falling to its lowest level in nearly three years.

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The Japanese currency fell to 113.495 per US dollar on Tuesday, a level not seen since December 2018, after its sharpest fall in five months and four consecutive weeks of declines on Monday.

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Over the past month, the yen has weakened against each of its G10 counterparts, partly driven by an oil rally, as the yen moves out of the country to buy increasingly expensive crude.

In fact, for the first time in three years, Brent crude reached a peak of $ 85 per barrel on Monday.

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Japan buys almost all the oil it needs abroad. A weaker yen makes those imports more expensive, reducing company profits as companies try to absorb higher costs instead of raising prices for homes, struggling with weak wage growth over a long period of time. have been.

“A weaker yen in oil when a rally in oil is gaining momentum will help national income flow overseas,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

“Given Japan’s limited domestic production facilities, the benefits of exports will be limited, so for the economy, you can call this a ‘bad’ yen weakness.”

Stock investors are already taking a serious view of the yen’s sharp fall.

Japan’s Nikkei stock average fell 0.94% on Tuesday, while the broader topex slipped 0.70%, with importers’ stocks being particularly hard hit.

Electric and gas companies – the big energy importers – fell the most in the Topix sub-sectors, losing 2.2%, followed by airlines and retailers.

Automakers, the traditional beneficiaries of currency weakness, gained only 0.5%.

A combination of higher oil prices and a weaker currency pushed wholesale inflation to its highest level in 13 years last month, Bank of Japan data showed on Tuesday, resulting in a painful squeeze on profit margins.

Tohru Sasaki, Tokyo-based head of Japan market research at JPMorgan, said, “Japanese consumers are very price sensitive – if they see that the price of something has gone up, they don’t buy it – so companies absorb higher costs.” Huh.” Joe predicts that the yen will be at 114 per dollar by the middle of 2022.

“The question is how much more they can absorb,” he said. “It’s already painful.”

This does not mean that consumers are completely insulated. Prices are climbing at gas pumps, and staples from coffee to beef are rising for the first time in years.

Osamu Takashima, head of G10 FX strategy at Citigroup Global Markets Japan, sees the possibility of the yen falling to 114.50 per dollar in the near term. But instead of causing harm, he said it would fuel much-needed inflation in a country that has been battling falling prices for decades.

“Any inflation is ultimately good for the economy,” Takashima said.

“Of course, high oil prices are negative for the economy of Japan and for every economy globally, but I don’t think the current levels pose a serious threat.” (Reporting by Kevin Buckland; Editing by Ana Nicolasi da Costa)

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