TRUTH LEEM
From the FT's Lex blog
Japanese executives are unlikely optimists. For much of the past year, they have watched successive currency interventions from the Bank of Japan, acting under orders from the government, fail to arrest a strengthening yen.
But despite that, they are convinced that the currency will describe a gentle arc of depreciation over the remainder of this fiscal year to March.
Not a single company on the main board of the Tokyo Stock Exchange assumes an average of less than 80 yen to the dollar over that period, notes Citigroup. Ominously, it has been in exactly that territory for the past two weeks, as investors chew over the apparently tightening odds on a further round of monetary easing from the Federal Reserve.
With the BoJ unlikely to abandon its zero interest rate policy any time soon, the outlook from the desk of Ben Bernanke may remain the main determinant of the dollar-yen rate. The longer U.S. politicians dither over the debt ceiling, the worse the prospects for yen relief. Ditto the contortions in the euro zone: the yen has strengthened by 8 per cent against the euro since April. That is why the Japanese currency pushed higher against every major counterpart bar the Swiss franc on Monday, despite some tough talking from finance minister Yoshihiko Noda on Sunday about taking "resolute actions when necessary".
For manufacturers, the customary response to a prolonged period of yen strength is to set up natural currency hedges by shifting more costs abroad. Yet this is inevitably a slow process. Canon, the world's largest camera maker, for example, has done so aggressively in recent years: its overseas production ratio of 52 per cent at the halfway stage this year, among Japan's highest, was up from 49 per cent a year earlier. Yet a 9 per cent rise in the dollar/yen rate was an important factor in the 20 per cent decline in net income in the second quarter from the previous year. On Monday, with the dollar at 78 yen, Canon slashed its dollar/yen forecast to 80, from 85 in April. More companies should follow.