Surprising Current Account Balance Reassessment of the Yen

A rapid appreciation of the yen is occurring. The reason is, as written in three changes in the environment of the dollar/yen market.Changes in the environment of the dollar/yen rate: Three changesAs described. However, we did not anticipate this level of yen appreciation at all.

From Japan’s balance of payments for March, it became clear that overseas securities investors seem to be the cause of the yen’s appreciation. Now, there is a possibility that they are buying Japanese government bonds again.

Furthermore, behind the yen’s appreciation was concerns: high crude oil prices ⇒ worsening of Japan’s trade balance ⇒ worry about a current account deficit. Yet Japan’s income balance remains solid. It seems unlikely that the current account deficit will occur so easily.

Right now, it is not the yen but the euro that is being targeted. China’s zero-COVID measures leading to economic slowdown ⇒ reduced imports have also led to selling Australia’s dollar, which is a major export destination, and the impact of China’s economic slowdown is a drop in commodity prices favoring the yen. The fall in commodity prices due to China’s slowdown could also cause inflation in the United States to subdue faster than expected, and rising U.S. medium- to long-term interest rates are also being restrained. This also contributes to yen appreciation.

However, U.S. inflation stems from wage increases, so monetary tightening will continue. That will lead to a fall in the price-earnings ratio of U.S. stocks, pushing stock prices down. With stock price declines, a wealth effect to curb demand and contribute to price decreases will occur.

Because monetary tightening continues, medium- to long-term interest rates are unlikely to fall easily, so there may be a limit to yen strength.

Changes in the environment of the dollar/yen market: Three changesWe said that the dollar strength/yen weakness had ended, but the direction of dollar/yen is still unclear.

The above may be hard to understand. In short, the environment is changing, but one point has not changed: “U.S. wage pressure ⇒ price increases ⇒ rate hikes.” It is certain that the gap between short- and long-term rates will narrow in the future, but as rate hikes continue, it does not seem that long- to medium-term rates will decline, which may support the dollar. As a result, the direction of dollar/yen remains difficult to see.

===============================

At first, the “surprising balance of payments” referred to the concern that high crude oil prices would worsen Japan’s trade balance and raise worries about a current account deficit, but in March’s balance of payments it became clear that Japan’s income balance is healthy and is unlikely to easily become a current account deficit. Going forward, a deteriorating global economy could reduce Japan’s income balance, but that would in turn lead to a drop in commodity prices and help restrain Japan’s trade balance deterioration.

Today, Japan’s balance of payments was announced.

Current account surplus was 2.5493 trillion yen. Larger than expected.

Direct investment income rose to 2.3702 trillion yen from 1.4804 trillion yen in the same month last year, an increase of 889.8 billion yen.

Securities investment income also improved; although bond interest income slightly declined year on year, dividend income was strong, and the income balance was favorable.

Now, with many companies releasing last year’s results, except for some like SBG, global companies’ earnings are good. They have received substantial profits as dividends from overseas subsidiaries in March.

Recently, one reason Japanese companies’ stock prices have been holding up is probably related to this.

However, although last year’s results were better than expected, this year’s outlook is not so bright.

When Yaskawa Electric’s February earnings were announced, the outlook for this year looked good, but now it is somewhat pessimistic. TOPIX’s EPS may decline this term. The stock price that had held up becomes questionable.

Returning to the balance of payments,

the current account balance is favorable.

Nevertheless, yen depreciation progressed from March onward. What could that mean?

Looking at the balance of payments as a whole.

What sold the yen was not Japanese residents but overseas investors: selling of Japanese stocks, Japanese bonds, and others (mostly short-term Japanese government securities).

In March, overseas investors’ net sales of Japanese stocks and Japanese bonds (including short-term bonds) amounted to 8.8 trillion yen, the second-largest after March 2020’s COVID-19 outbreak.

Then why did overseas investors sell so much? Global inflation is likely a factor.

In other words, did they fear the Bank of Japan would raise rates?

If the BOJ raises rates, it would be a major event, unlike in Europe or the United States.

Now, expectations of BOJ rate hikes are diminishing.

Therefore, they are unlikely to hurriedly pull funds out of Japan.

Has the rapid yen depreciation ended?

We don’t know April’s data yet, but if overseas investors dumped too much of their yen-denominated bonds, there could be a buying rebound, which would lead to yen appreciation.