Japan’s Nikkei 225 index registered its biggest ever daily fall on Monday, plummeting by over 12 per cent and continuing the extraordinary collapse that began last Friday. Meanwhile, the Yen, which had been slowly eroding in value for months continued its dramatic resurrection moving from 162 to the dollar to under 140. At the time of writing, a technical rebound seems to be underway – but such volatility is alarming. After years of nothing very interesting happening to the Japanese economy, such upheavals have stunned locals and provoked urgent questions about causes and consequences.
As to what has caused this, most are pointing to the Bank of Japan’s surprise interest rate hike last week coupled with the ripple (more like tsunami) effect of negative economic data from the US and worries about a potential stateside recession. Another key factor is the unwinding of the notoriously risky carry trade, in which investors borrow in Yen and buy assets denominated in other currencies.
Younger Japanese are particularly vulnerable
The reaction to it all in Japan has been a mixture of shock, mild panic, and, from a few who sense opportunities, excitement. The shock is probably a result of the complacency and pessimism engendered by the ‘institutionalised inertia’ of a hugely indebted country with stagnant growth and a calamitously ageing population whose economy seemed stuck in an inescapable rut and whose currency seemed moribund. Added to which, the complexity of the carry trade meant few were aware of how significant this phenomenon was – or even what it was.
As for panic, most worried by it all are probably the corporates, whose goods, thanks to the much stronger Yen, will now be more expensive overseas. According to Bruce Kirk, chief Japan equity strategist at Goldman Sachs, big exporters would struggle to make any money with the yen under 150 to the dollar. The Yen is currently 144 to the dollar and Masafumi Yamamoto, chief currency strategist at Mizuho securities predicts 140 in the near future. Scary stuff.
The politicians are sweating too. If corporate profits plunge so will tax revenue, so chief cabinet secretary Yoshimasa Hayashi said the government would monitor the situation ‘with a sense of urgency’ – a striking choice of words from a Japanese politician.
As for ordinary Japanese, there is apparently high anxiety amongst investors in the government’s NISA (Nippon Individual Savings Account), modelled after the UK’s ISA, which aims of turn the trillions of Yen squirrelled away in ordinary savings accounts into working investments in stocks. The NISA has been around since 2014, but prime minister Fumio Kishida overhauled the scheme in January to allow larger investments as part of his much vaunted ‘new capitalism’ initiative, which emphasises better wealth distribution and virtuous growth cycles. Following the stock crash however, there are reports of securities firms being flooded with calls from anxious NISA holders worried that their investment may evaporate.
Saisuke Sakai, senior economist at Mizuho research, noted that it is younger Japanese who are particularly vulnerable. First-time investors in particular were attracted by the shiny new-ish/revamped NISA product, many of whom will be double whammied by increased borrowing and mortgage costs likely to follow the BOJ’s rate hike.
But not everyone is so gloomy. Message boards are peppered with comments from foreign workers in Japan who have suddenly seen their wages (in dollar or sterling terms) rise considerably. Those that were around during the financial crash of 2008 are experiencing deja-vu as they remember when the ‘safe haven’ effect kicked in and investors flooded into Japan to supercharge the yen to giddy heights. Happy days! I remember them well.
More than a few Japanese might be happy to see a stronger Yen too. The weak currency has facilitated Japan’s rather ridiculous status as a budget destination and led to serious issues with overcrowding. If a stronger yen means there’s a commensurate drop off in visitor numbers, don’t expect too many complaints. One savvy Japanese friend’s overall summary was this: ‘It’s GOOD news. The stock market didn’t reflect the true state of the economy. The carry trade should be banned!’
What happens next is hard to predict. But one interesting discussion that the drama will surely provoke is: given this evidence of how closely calibrated the Japanese economy is to the US economy (and geopolitics generally), who will be the better choice of president for Japan, Trump or Kamala?
Until now, the establishment seemed to be leaning Democrat: Trump’s ‘America first’ philosophy had prompted fears that US military protection might be scaled back and tariffs imposed on Japanese goods (the auto industry especially). Biden and Kishida held a closely choreographed summit back in April and it looked as if the Japanese Liberal Democrat party leadership were firmly endorsing the incumbent.
But now? Trump’s team have engaged in some serious diplomacy recently to reassure Tokyo that their man will actively and positively engage in the region and support better relations between Japan and China. And as for the economy, the Trump years seemed like a millpond compared to the choppy waters of the last few days.
With many now seriously predicting a US recession, maybe one legacy of the ructions is that Trump 2.0 will start to look more attractive to the Japanese.