What a weak yuan means for Japan

posted on January 17, 2016

China's sagging economy sent the yuan falling more than 1.4% against the dollar in the first two weeks of 2016. This has pummeled stock prices and commodity currencies around the globe. Tokyo stocks have been jolted, too. Yet for Japan, the weak yuan means more than just angst in the capital's financial district.

In the past few years, "Abenomics," the government's economic-revival program, along with the Bank of Japan's monetary easing, became the basis of Japanese companies' expectations for a prolonged weak yen. Companies that expanded their operations overseas have reserved their foreign-earned profits, as they were expecting a further drop of the yen. J.P. Morgan estimates that Japanese corporations' overseas stockpiles have reached 48.5 trillion yen ($410 billion) in fiscal 2015, through March, with China accounting for 5 trillion yen of that.

The yuan's value against the yen has declined more than 3.4% since the beginning of this year. The sharp drop is something that "can no longer be ignored when considering corporate performance," said Tohru Sasaki, head of Japan markets research at J.P. Morgan Chase Bank.

Sasaki foresees that as March -- the end of fiscal 2015 -- gets closer, Japanese companies will increasingly look to hedge by swapping some of their yuan for yen, or even repatriate those earnings. This will place even more downward pressure on the yuan. Most economists expect the yuan to decline another 10% before the end of this year.

source by nikkei
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