- In late April the yen fell to its lowest level against the dollar since 1990, and on 29 April the Japanese authorities intervened in the market.
- A weak currency favours Japanese exporters but makes what the country imports dearer.
- Anyone with income, debts or assets in another currency should review how the exchange rate affects them.
In late April 2024, the yen weakened to its lowest level against the dollar since 1990. On 29 April, the Japanese authorities intervened in the market to stop the slide. That one of the world’s major currencies should reach a low not seen in more than three decades, and that its own government should have to act, is a signal that deserves attention beyond Japan.
To a reader in Barcelona the yen may seem a foreign currency, but exchange rates are a silent part of almost every economic decision: the price of a trip, the cost of an import, the value of an investment abroad or the payment on a loan in a currency other than that of one’s income. Understanding what happened helps one think more clearly about one’s own currency risk.
A very cheap yen
A very cheap yen made Japanese travel and goods cheaper for those buying with other currencies. With the same amount of euros or dollars one could buy more in Japan, something foreign visitors notice at once in hotels, restaurants or shops. For tourism and for certain exporters of consumer goods, it is a tailwind.
For Japanese exporters, a weak currency improves competitiveness: when they sell in dollars or euros and convert that income into yen, they receive more. But it makes what the country imports dearer, such as energy and many raw materials, and that passes through to the prices paid by Japanese companies and families. A weak currency is therefore not an advantage without cost. Japanese consumers, who pay more for imported energy and food, feel it in their monthly budget.
Intervention and hidden risk
Intervening in the market means the authorities buy their own currency to stop its fall. It is a tool used only exceptionally, because its effectiveness depends on the resources available and on the market believing the measure will be sustained. It can halt a sharp fall, but it rarely changes the underlying trend on its own. That is why interventions tend to be read more as a warning to speculators than as a definitive solution.
But the cheap yen hid a risk: the yen funding of many investments. While the currency stays weak and stable, borrowing in it is attractive. That risk would erupt in August. It is an example of how a comfortable situation can hide a fragility that is only seen when the context changes, and that is why it is worth asking what today’s apparently effortless arrangements depend on.
Currency matters
Anyone with income, debts or assets in a currency other than their own should be aware of how moves in the exchange rate affect them. A company that is paid in dollars and pays its expenses in euros, a family with a loan in another currency or an investor with foreign assets are exposed, whether or not they sought it. Exposure to a currency does not depend on travelling or investing abroad: it is enough for a supplier, a client or a contract to be tied to it.
It is worth reviewing what part of one’s wealth or business depends on foreign currencies and what would happen with a sharp move in the exchange rate. There are ways of reducing that risk, from adjusting the currency of contracts to hedging with financial instruments, but all have a cost and require a clear understanding of what is being contracted. It is a useful conversation to have with the adviser, before the exchange rate forces it. And it is best done calmly, when the currency is moving little, not when there is already a rush.
A calm exchange rate is not a guarantee, only a circumstance.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
