This article first appeared in The Edge Malaysia Weekly on May 27, 2024 - June 2, 2024

JAPAN appears to be one of the most popular countries to visit at the moment given how common it is to encounter someone who has either just returned from the Land of the Rising Sun or plans to visit soon.

Even for Malaysians who gripe about the ringgit being weak — albeit with good reason — the Japanese yen has never been so “cheap”, at least in the past decade or two.

Malaysians are certainly taking advantage of the cheaper yen. According to preliminary statistics by the Japan National Tourism Organisation (JNTO), the number of Malaysian tourists to Japan increased by 9.4% to 180,200 in the January to April 2024 period from 164,766 in the corresponding period in 2019 before the Covid-19 pandemic hit.

Malaysians are not the only people flocking to Japan. The JNTO recorded a total of 11.6 million visitor arrivals in the first four months of this year, a 5.7% increase from 10.98 million for the same period in 2019. Visitor arrivals were led by South Korea, followed by China and then Taiwan.

While Japan is a favourite holiday destination for many, the yen’s weakness against many global currencies is likely to have played a role in its rising popularity.

What brought about this situation and will the yen slide further?

So far this year, the yen has suffered a huge setback as it has depreciated to multi-year lows against the US dollar, making it one of the weakest currencies in Asia in terms of depreciation.

Year to date (YTD), it has depreciated about 11% against the US dollar, even with speculated currency intervention by the Bank of Japan (BoJ). In comparison, the ringgit, which has also been hit by the strong US dollar, has been steadier, declining slightly over 2% YTD.

The extent of the yen’s decline has not been limited to the greenback, as it has also fallen against most currencies globally. In Asia, it has slid 5.7% against the South Korean won, 7.75% against the ringgit, 6.2% against the Indonesian rupiah and 4.6% against the Thai baht.

At the time of writing, it was trading at 157.09 against the greenback.

It is worth noting that the BoJ has been the last to hold out on interest rate hikes. But in March, it made a historic shift out of negative interest rates and raised short-term interest rates by between 0% and 0.1%.

However, the central bank’s dovish stance in the following month, giving no indication that rates would be raised further, led to massive selling of the yen down to a 30-year low of 160 against the US dollar.

“The Japanese yen’s weakness so far this year has been due to the market perception that the BoJ is not in a rush to normalise monetary policy. And this has been compounded by carry trades in the yen,” says OCBC foreign exchange strategist Christopher Wong.

Moody’s Analytics in a May 10 report states that the differing monetary policy between the BoJ and the US Federal Reserve is a factor that has led to the yen’s weakness.

“The BoJ has raised interest rates very gradually while the US Fed has moved hard and fast, widening the gap between rates in Japan and those in the US. Ten-year US Treasury bonds are trading around 4.5%. Yields on 10-year Japanese government bonds are trading about 1%, with a fair amount of squinting,” the report says, noting that this is a draw to move funds from Japan to the US.

Moody’s says what would be harder to put a finger on is the impact of shifting expectations, as investors are debating how far and how fast interest rates in Japan will increase as little clarity has been provided by the central bank.

“Central bank officials have been ambiguous in their communications throughout the past year, signalling a dovish policy bias one day only to tighten policy the next,” says Moody’s, adding that this strategy of staying ambiguous carries risk.

“Ambiguity about the state of the economy and the future policy path encourages speculation. That speculation can itself become a source of currency weakness. Indeed, bets against the yen are at a record high,” it adds.

OCBC’s Wong is of the opinion that the BoJ could potentially be more hawkish than what the market perceives, judging from the central bank’s recent minutes.

“Many in the board called for steady rate hikes on prospects that inflation could durably stay or even exceed the 2% target. One monetary policy committee member also indicated that it is quite possible that the pace of policy normalisation will accelerate if the underlying inflation continues to deviate from the baseline scenario against the backdrop of a weaker yen,” he says.

Just last week, news reports quoted BoJ governor Kazau Ueda as stating that the Japanese economy was on track for a recovery, which many see as an indication that the first quarter gross domestic product slump will not stop the central bank from raising interest rates in the near future.

Market watchers are anticipating that the BoJ will hike interest rates by July due to the weakening yen.

Wong says there is a risk that markets may underprice the magnitude of the yen’s appreciation if the BoJ does turn out to be more hawkish than expected.

“(In the) near term, the yen’s softness may linger. But in the medium term, we do look for the yen to play catch-up in terms of gains, on expectations that the BoJ has room to further pursue policy normalisation amid higher services inflation and wage pressures in Japan and that the Fed is getting closer to a dovish pivot/rate cut.

“We also do not rule out Japan authorities intervening in the yen should yen depreciation become more excessive and one-sided,” comments Wong, adding that he projects the JPYMYR to rise to 3.13 by year end from 3.00 to 100 yen at present.

Moody’s believes there will be increased yen volatility going forward as markets continue to challenge the yen, raising the odds that the BoJ will hike rates sooner than expected.

Similarly, Moody’s believes the Japanese authorities will try to stem the yen’s depreciation through forex intervention.

“The intervention will not target a particular exchange rate, but rather the pace and direction of change. Recent suspected interventions fit the pattern, as they pushed back against one-sided yen depreciation when Japanese markets were closed for public holidays. That meant liquidity was low, making intervention more effective,” it observes, pointing out that Japanese foreign reserves of more than US$1.2 trillion (RM5.65 trillion) give the BoJ more room for intervention.

In general, economists and the business community do not see the weakening yen impacting external trade significantly.

Malaysia’s exports to Japan amounted to RM23.85 billion for the first three months of 2024, while imports were RM17.98 bilion.

Exports to Japan only make up half of Malaysia’s exports to China — Malaysia’s biggest trading partner — and a quarter of the import value from China. In the first quarter of this year, exports to China amounted to RM44.49 billion while imports amounted to RM67.78 billion, according to data from the Department of Statistics.

Malaysian exports to Japan comprise largely mineral fuel — with the bulk of it being natural gas — and also electronics and machinery.

On the other hand, Malaysia largely imports transport goods, cars and parts, which account for about half of import value, while other main imports include machinery as well as electrical and electronic equipment.

Among the automotive players in Malaysia, analysts say Bermaz Auto Bhd (KL:BAUTO), distributor for Mazda in Malaysia, is the only company they see possibly being impacted by the yen fluctuation.  Other players such as Tan Chong Motor Holdings Bhd (KL:TCHONG), distributor for Nissan, and unlisted UMW-Toyota Motor Sdn Bhd, distributor for Toyota and Lexus, mainly import cars and parts in US dollars.

Analysts say Bermaz is the most sensitive to yen fluctuation among the Malaysian automotive players as 25% to 30% of its cost of goods sold is exposed to the currency.

Even so, AmInvestment Research says in an April 30 sector report that every 1% change in the currency would only impact Bermaz’s net income by 5%.

Nevertheless, some companies may benefit from the weak yen, although the impact would be temporary.

QES Group Bhd (KL:QES) managing director and president Chew Ne Weng says the weak yen has affected the group favourably in terms of cost of equipment and parts imported from Japan.

QES manufactures and distributes semiconductor equipment, specialising in high-precision motion-controlled equipment.

“For large orders under our distribution division, we usually conduct a natural hedge by getting a purchase order (PO) from customers in yen, given that our costs are in yen as well. In other words, there are no foreign exchange risks.

“However, our manufacturing division will be seeing forex gains from the yen as our POs are all in the US dollar. Such currency exposure essentially means that the Hirata robots and other linear scales or stepper motors are much cheaper now,” he adds.

That said, the impact on the country’s overall trade and even most of the business community may be small or insignificant.

But the individual looking to travel to Japan will certainly get more bang for his buck — or rather, yen, in this case. 

Note: This article has been amended for accuracy. 

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