A stronger yen is not such a bad news for Japan as one may think

• As global markets expect further easing by the Fed, the Yen has appreciated once again, raising concerns on the impact of such a strong Yen on the Japanese economy. With increasing downside risk for the US economy, the Fed is expected to introduce some form of yield curve control (YCC), pushing further on quantitative easing (QE). This should put additional pressure on the Yen, which has already appreciated to USDJPY=105.5. This level is stronger than the expected level by Japanese manufacturers on the July Tankan survey of 107.88.
• In principle, a stronger Yen should further delay the recovery of the Japanese economy but there are some positive aspects to it. First of all, the gains from a weaker Yen are hard to be obtained anyway, as social distancing measures globally reduce the demand for Japanese exports of goods and tourism without much price sensitivity. In other words, even with a much weaker Yen, it would be hard for Japan to increase exports or attract tourists, which has been one of the bright spots of Abenomics. Second, a stronger Yen improves Japanese consumers’ purchasing power through falling import prices.
• Finally, even if the BoJ were to worry about the value of the Yen moving below 100, its limited policy ammunition will make the BoJ think twice before engaging in more QE. Not only has the BoJ bought too large a share of Government paper (JGBs) but also lowering rates to an even more negative territory (say -0.2%) can be extremely detrimental for financial institutions, by squeezing banks’ profit margins further. At most, the BoJ could extend the program to buy commercial paper and corporate bonds at the September meeting from March 2021 to the end of the year but this will probably not be read as enough to depreciate the Yen compared to the likely announcement by the Fed to introduce YCC.
• Finally, for the sector suffering the most from the strong Yen, namely corporates, the government is currently developing a second fiscal stimulus package for FY2020. Under the current discussion, the wage subsidy program which would expire in September is likely to be extended to December, which is anticipated to support employment but also control companies’ labor costs.

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