Japanese companies rarely complain about weak yen! Exchange rate volatility is “harmful” and yen weakness may cause chaos in financial markets

According to Zhitong Caijing APP, Japanese corporate executives are calling for a stronger yen, even those companies that have benefited from the weakened yen are no exception. Detailed data from the Bank of Japan’s Tankan survey published in July shows that Japanese companies expect the average exchange rate for the second half of this year to be 1 USD to 152.51 yen. Although the yen has strengthened rapidly in the past two weeks, from a historical perspective, it remains at a weak level. According to Macrotrends data, the average USD-JPY exchange rate over the past 10 years was about 1 USD to 123 yen. On Thursday, the yen stood at 1 USD to 156.3 yen.

Kazuo Kanemura, Chairman of Kawasaki Heavy Industries, said in an interview on Tuesday that when the yen exchange rate fluctuates, "we cannot formulate strategies," which is the company's "biggest problem." Kanemura also stated that if the yen strengthens—reaching 1 USD to 150 yen—he may consider moving manufacturing operations back to Japan from the United States. According to a report released by the company last year, Kawasaki Heavy Industries has 27 production bases overseas, including the United States, and 17 domestic production bases in Japan.

Takayuki Ueda, President and CEO of Japanese energy giant Inpex, hopes the yen exchange rate will be even stronger. He stated that 1 USD to 100 yen would be an "appropriate" level, in line with the state of the Japanese economy.

Inpex's revenue for the first half of this year declined compared to the same period last year due to reduced crude oil sales, but the company said in its financial report that the yen had depreciated 6.7% to 1 USD to 158.37 yen, helping offset part of the revenue drop.

Even though nearly 90% of this Japanese oil company's business is overseas and transacted in U.S. dollars—which means the company actually benefits from a weak yen—Takayuki Ueda still made these comments. He stated: "If we look at the overall Japanese economy, the current exchange rate level might be too weak."

Takeshi Hashimoto, Chairman of Japanese shipping giant Mitsui O.S.K. Lines, said in an interview last week that he hopes to see a stable foreign exchange market, and stated that keeping the yen at 1 USD to 150-155 would "bring peace of mind." Mitsui O.S.K. Lines' revenue is also primarily denominated in U.S. dollars, so it too benefits from a weak yen. But Hashimoto said: "We are somewhat concerned that the (weak yen) could cause turmoil in the financial markets."

Investors expect the Bank of Japan to raise rates by 25 basis points at its two-day policy meeting ending Friday, lifting the policy rate to 1.25%. However, the Federal Reserve raised rates on Wednesday for the first time since 2023 and is expected to make further hikes, prompting traders to bet on three more rate increases by mid-next year. This could keep the U.S.-Japan interest rate gap wide. Even though the market has largely priced in the BOJ's Friday rate hike, unless BOJ officials convince markets of further tightening, the yen may continue to weaken.

Investors will be watching Bank of Japan Governor Kazuo Ueda’s remarks at the news conference following the rate decision for clues regarding the BOJ's further pace and scope of tightening. Rinto Maruyama, Senior Rates and FX Strategist at SMBC Nikko Securities, said the renewed decline of the yen gives the BOJ more reason to highlight upside inflation risks, and rising oil prices may provide policymakers with justification for additional tightening.

Rinto Maruyama stated that the rate hike expected from the BOJ on Friday will bring Japanese policy rates into an estimated neutral range, making it unlikely that officials will signal a 50 basis point hike or back-to-back hikes. He believes that if this meeting is interpreted as dovish, then 158 will be the next upward target for USD/JPY. This means that if investors judge the BOJ’s tightening cycle cannot keep pace with the Fed, the yen will become vulnerable. Rinto Maruyama believes that over time, if U.S. interest rates rise faster than Japan's, USD/JPY could gradually return to 160.

Matthew Ryan, Head of Market Strategy at Ebury, said he expects the BOJ to hike rates and deliver hawkish commentary. He stated: "The BOJ faces an extremely high level of risk and could in fact endorse ongoing quarterly rate increases from here."