The Japanese yen edged higher on Friday as traders remained alert to the risk of intervention by Japanese authorities ahead of the weekend. This move coincided with a weakening US dollar following the latest US inflation data, which prompted markets to scale back bets on further Federal Reserve rate hikes.
At the time of writing, the yen traded at 161.58 per US dollar, recovering slightly from a two-year low of 161.95 touched on Thursday. However, it remains near its weakest level since 1986 at 161.96. With the yen still weaker than the key 160 level—widely seen as a 'red line' for Japanese officials—traders are on high alert for potential market intervention. Authorities have been vocal recently, issuing warnings about possible action.
Mitsubishi UFJ Financial Group, Inc. analysts noted in a research report that the risk of policy intervention by Japanese authorities is increasing. They stated that for the USD/JPY pair, a sustained break above higher levels could likely cause broader negative spillover effects across Asian FX markets through sentiment and positioning channels.
Simultaneously, a key Japanese inflation gauge rose in June for the first time in eight months, further solidifying expectations that the Bank of Japan will continue its monetary policy normalization and gradual rate hikes. This provided additional support for the yen. Data released on Friday showed the Tokyo metropolitan area core consumer price index, which excludes fresh food, rose 1.6% year-on-year in June, matching economists' median forecast. The reading showed a clear rebound from previously subdued levels affected by government subsidies, indicating a recovery in price momentum. The Tokyo CPI data is closely watched as a leading indicator of national price trends.
The 'core-core' CPI, which excludes both fresh food and energy and is more closely monitored by the Bank of Japan, rose 1.9% year-on-year. The overall CPI recorded a 1.7% increase. Analysts at ING Groep N.V. stated in a report that this data indicates the second-round inflation effects from rising oil prices are strengthening, while BoJ officials' rhetoric is becoming more hawkish. They added that with core inflation likely to accelerate further, they have brought forward their expectation for a BoJ rate hike from December to October.
Furthermore, a series of US economic data released on Thursday, including inflation figures, led markets to reduce expectations for further Fed rate hikes this year. Data from the US Bureau of Economic Analysis showed the personal consumption expenditures price index rose 4.1% year-on-year in May, the largest increase since April 2023, meeting market expectations. The core PCE price index, excluding food and energy, rose 3.4% year-on-year, also in line with forecasts.
Despite persistent inflation, consumer spending showed resilience, increasing 0.7% month-on-month in May, up from 0.4% in April and exceeding the market expectation of 0.6%. Looking ahead, potential intervention by Japanese authorities and the BoJ's progress on monetary policy normalization will be key factors in determining whether the yen can break away from its 40-year lows. Concerns over Japan's fiscal health may also continue to weigh on the currency.
Japan's Prime Minister recently unveiled an investment roadmap for the economy outlining massive spending, but over a 14-year implementation period, the critical question of how to fund the plan remains unanswered.
Yen Weakness Creates Divergent Fortunes for Japanese Companies
Even as the Japanese government considers new intervention measures to curb the yen's slide to near 40-year lows, the weak currency could deliver an unexpected windfall of approximately $5.8 billion in profits for the nation's automakers this year. Assuming the yen stays near current levels, calculations based on company forecasts by Bloomberg Intelligence show a combined profit upside of about 934 billion yen ($5.8 billion).
Toyota Motor Corporation's profit forecast, announced in early May, was based on an assumed exchange rate of 150 yen per dollar, while the current rate is around 161 yen. Toyota's management estimates that each one-yen depreciation boosts operating profit by 50 billion yen, suggesting significant benefits if the weakness persists.
Other major Japanese automakers have also set relatively conservative exchange rate assumptions in their outlooks: Honda Motor Co., Ltd. assumed 145 yen, Nissan Motor Co., Ltd. assumed 150 yen, while Subaru Corporation and Mazda Motor Corporation assumed 155 yen.
Meanwhile, raw material and energy costs may ease more than expected. Expectations for the reopening of the Strait of Hormuz following a tentative US-Iran peace deal have pushed oil prices significantly lower. In yen terms, crude oil prices have fallen more than 30% from their late-April highs.
Tatsuo Yoshida, a senior analyst at Bloomberg Intelligence, noted that for manufacturing companies like Toyota and Honda, which have already factored Middle East tensions into their full-year forecasts, recent developments could be a significant positive factor for profit expansion. He added that falling gasoline prices could also improve consumer sentiment and support car sales.
However, the majority of Japanese companies are facing substantial negative impacts from the yen's depreciation. A June survey by Tokyo Shoko Research found that 40.7% of respondent companies said the late-May exchange rate of around 159 yen per dollar had a negative effect. The hardest-hit sectors included wholesalers, domestic retailers, and traditional manufacturers focused on the home market, where import costs are a major factor. The average 'ideal' exchange rate cited by respondents was 136.8 yen per dollar.
For example, Nitori Holdings Co., Ltd., which imports furniture and home goods manufactured overseas, estimates that each one-yen depreciation reduces its operating profit by 2 billion yen. While the company uses a rate of 155 yen for budgeting, it develops products assuming 165 yen to ensure profitability even at that level. At current levels, Nitori expects to achieve its planned gross margin without raising prices.
Takahiro Kazahaya, a senior analyst at UBS Securities Japan, pointed out that many companies in retail, food service, and other traditional domestic-demand sectors have significantly expanded overseas, enhancing their resilience to yen weakness. He emphasized that the widening gap between consumer service companies in sectors like food service that can successfully pass on costs and manage expenses and those that cannot will significantly determine winners and losers and could act as a catalyst for industry consolidation.
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