Japanese companies rarely dislike weak yen! Exchange rate fluctuations are “harmful” to weakening yen or causing financial market chaos

The Zhitong Finance App learned that Japanese business executives are calling for a stronger yen, and even those that have benefited from the weak yen are no exception. According to specific data from the Quarterly Business Brief Survey released by the Bank of Japan in July, Japanese companies expect the average exchange rate of 1 US dollar to 152.51 yen for the second half of this year. Despite the rapid strengthening of the yen over the past two weeks, the yen remains at a weak level from a historical perspective. According to Macrotrends, the average exchange rate of yen to the US dollar over the past 10 years is about 1 dollar to 123 yen. Meanwhile, on Thursday, the yen was reported at 156.3 yen per dollar against the US dollar.

Kawasaki Heavy Industries Chairman Jin Huafang said in an interview on Tuesday that when the Japanese yen exchange rate fluctuated, “we were unable to formulate a strategy,” which was the “biggest problem” faced by the company. Jin Huafang also said that if the yen strengthens — the yen reaches 150 yen per dollar against the US dollar, he may consider moving the manufacturing business from the US back to Japan. According to a report released by the company last year, Kawasaki Heavy Industries has 27 production sites overseas, including the US; it has 17 production sites in Japan.

Takayuki Ueda, president and CEO of Japanese energy giant International Petroleum Development Teishi Holdings (Inpex), wants the yen exchange rate to be even stronger. He said that it would be “appropriate” for the yen to reach 100 against the US dollar, which is in line with the state of the Japanese economy.

International Petroleum Development Dishi Holdings's revenue for the first six months of this year declined compared to the same period last year due to a decrease in crude oil sales. However, the company said in its financial report that the yen depreciated 6.7% against the US dollar to 158.37 yen per US dollar, which helped offset some of the decline in revenue.

Takayuki Ueda made these remarks even though nearly 90% of the Japanese oil company's business is overseas and is traded in US dollars — meaning that the company actually benefited from the weakening yen. “If we look at it from the perspective of the Japanese economy as a whole, the current exchange rate level is probably too weak,” he said.

Hashimoto, chairman of Japanese shipping giant Mitsui O.S.K. Lines (Mitsui O.S.K. Lines), said in an interview last week that he would like to see the foreign exchange market remain stable, and that keeping the yen in the 150 to 155 range against the US dollar would make him “feel at ease.” MOL's revenue is also mainly denominated in US dollars, so it can benefit from the weakening yen. However, Tsuyoshi Hashimoto said, “We have some concerns that (the weakening yen) will cause chaos in the financial markets.”

Investors expect the Bank of Japan to raise interest rates by 25 basis points at a two-day policy meeting ending on Friday, raising the policy interest rate to 1.25%. However, the Federal Reserve raised interest rates for the first time since 2023 and is expected to raise interest rates further on Wednesday, prompting traders to bet that there will be three more rate hikes until mid-next year. This is likely to keep the interest rate spread between the US and Japan wide. Even if the market has fully priced the Bank of Japan's interest rate hike on Friday, the yen may continue to weaken unless the central bank officials can convince the market that monetary policy will be further tightened in the future.

Investors will pay attention to Bank of Japan's statement by Kazuo Ueda at the press conference after the announcement of the interest rate decision to find clues about the pace and scope of the Bank of Japan's further tightening. Rinto Maruyama, senior interest rate and foreign exchange strategist at SMBC Nikko Securities, said that the restart of the decline in the yen gave the Bank of Japan more reason to emphasize the upward risk of inflation, and the rise in oil prices may provide a reason for policy makers to further tighten policies.

Rinto Maruyama said that the Bank of Japan's anticipated rate hike on Friday will bring Japan's policy interest rate into a neutral range of estimates, making it unlikely that officials will release a signal of 50 basis point rate hikes or continuous rate hikes. He believes that if this meeting is interpreted as dovish, 158 will be the next upside target for USD/JPY. This means that if investors decide that it is difficult for the Bank of Japan's austerity cycle to keep up with the Federal Reserve, the yen will become weak. Rinto Maruyama believes that over time, if US interest rates rise faster than Japan, the dollar is expected to gradually rise to 160 against the yen.

Matthew Ryan, head of market strategy at Ebury, said he expects the Bank of Japan to raise interest rates and make hawkish remarks. “The risk faced by the Bank of Japan is extremely high, and it actually approves continuing to raise interest rates on a quarterly basis thereafter,” he said.