International | Jun 25 2007
By Chris Shaw
For several years GaveKal Research held to the theory the yen would trade in a range of 110-120 against the US dollar, as at the 110 yen level and factoring in interest rate differentials it was sensible investment strategy for the Japanese to export money and take on the foreign exchange risk but at 120 yen the risks were too high.
In recent months this theory has failed to hold, with the yen now trading at more than 123.5 against the greenback, yet Japanese investors are still comfortable with the forex risks associated with investing overseas.
There is evidence to support the fact the Japanese are continuing to invest overseas rather than domestically as GaveKal notes the level of foreign ownership of Japanese companies is at record levels, while data indicates Japanese investment in overseas assets is also quite high.
According to the group’s assessment there are two reasons this is occurring even at current exchange rates, the first being Prime Minister Abe has proven something of a disappointment in following on from the more charismatic Junichiro Koizumi. In GaveKal’s view there is a chance Abe won’t last past August, when upper house elections are scheduled.
The group’s second reason is simply that Japan’s relatively mature economy and the more modest growth outlook it offers looks less attractive when compared to the faster growth being achieved throughout much of Asia.
This raises an issue for the global economy in the group’s view as while the weakness of the yen is offering strong benefits to Japanese industry in terms of increasing its competitiveness in global markets, there must be a corresponding impact on the rest of the world.
There are two conclusions the group draws as to the impact for the global economy, the first being the weak yen is helping to keep prices in check throughout the OECD nations. Such an outcome appears reasonable given inflation currently appears relatively under control in most major economies.
The second conclusion it makes is while Japanese producers are gaining market share by exploiting their weak currency, global industrial margins are likely coming under pressure. This in turn leads to two possibilities in the group’s view – either the global economy is far stronger than the data suggest, or industrial stocks attempting to compete with Japanese manufacturers are soon likely to suffer as the impact of the weak yen takes hold.
It appears an interesting few months are ahead of us.