Land of the rising Yen

TRAVELLING in Japan has always been enjoyable but expensive.

However, in the past two years, the financial pain has been somewhat mitigated by the steep drop in the value of the yen against the Singapore dollar.

As such, I looked forward to going to Kyoto last week for the sakura season - my first trip back there in seven years.

It didn't disappoint. The weather was gorgeous and having dinner under the cherry blossoms turned out to be an out-of-this-world experience against the backdrop of roars of laughter from other diners as they enjoyed the warm spring weather.

There is another point worth flagging about travelling to Japan now: When I was last in Kyoto, the Singdollar could only fetch 62 yen. Now I get 80 yen for each Singdollar - a big 29 per cent more to be exact.

Yet, despite the depreciation of the Japanese currency, prices at my favourite sushi joint in the Kyoto train station have stayed unchanged in the intervening period.

And it turns out that this does not apply only to sushi but to other food and consumer products as well.

That means foreigners like me get more bang for my money when I shop in Japan.

It is a phenomenon which other tourists may have discovered as well. The water filters I get from the Bic Camera store in Ginza costs me $5 less than the Best Denki outlet in Singapore. For big ticket items, there may be greater savings.

As such, I was not surprised that Japan attracted 20 million foreign visitors last year and securities house Nomura is forecasting another 20 per cent surge in overall tourist numbers this year.

For tourists, it makes sense to enjoy Japan while the yen stays at its current depressed levels. But it is a trend that may not last.

Going by the movements in the foreign exchange markets, the yen looks set to rebound to the despair of budget travellers like myself who want to make further trips to Japan.

In the week when I was in Kyoto, the Japanese currency had strengthened from 113.65 yen to 108.19 yen against the US dollar - an astounding 4.8 per cent gain in just seven days.

As such, I am not surprised to find people scrambling to hoard yen.

When I went to change money at my regular money changer at Parkway Parade just before my departure, the proprietress said that she was completely cleaned out of Japanese yen and I had to wait a while until her staff came back from the bank with more of the currency.

At first, I thought that this was due to the many people going to Japan for the sakura season. But on reflection, the strong retail demand for yen could also be partly due to some people taking a wager of the yen appreciating in value.

While the slowly appreciating yen means that it will cost us more to travel in Japan in future, it also has big implications on the financial markets.

As the yen gained in value in the past week, the Japanese stock market has taken fright, with the benchmark Nikkei-225 Index tumbling about 7 per cent in value.

That the yen should be appreciating at all defies belief. After all, when the Bank of Japan shunned markets at end-January by adopting a negative interest rate policy (NIRP), the assumption was that it would result in the yen weakening further.

This is because there is no incentive for an investor to keep his money in a currency which not only earns him nothing, but requires him to pay for the privilege of keeping it in the bank.

Instead, after the initial shock which saw the Japanese currency sinking to 120 yen against the greenback, the yen has been on an upward trajectory.

What has transpired is that in the past two years, as the Japanese government went on the warpath to reflate the moribund Japanese economy by printing yen by the trillions, offshore investors had been buying Japanese stocks and shorting the yen as they bet that the Japanese currency would decline in value against the dollar.

With the adoption of the NIRP, which is supposed to incentivise the banks to lend out the money instead of leaving them idle on their cash balances, they may have inferred that Prime Minister Shinzo Abe's scheme to invigorate the economy is not having the desired outcome.

Hence, they have been selling Japanese stocks and closing out their "short" yen positions.

When the "short" yen positions are closed, it relieves the selling pressure on the yen and causes it to rise. And when investors see a rising yen, they take it as a signal to sell even more of their Japanese stock holdings. This turns it into a classic "sell" feedback loop with horrendous consequences.

This week, the Tokyo stock market was able to steady its wobble and stage a rebound, as the yen retreated to 109 against the US dollar as the BOJ hinted at further interventions to try to weaken it.

There is another consequence worth watching: the beneficial impact which the rising yen is having on regional stock markets after the belting they received in January.

With the implementation of NIRP, Japanese have been net buyers of foreign stocks as a new yen carry trade flourishes with investors borrowing in yen at negligible interest rates to snap up riskier assets such as Southeast Asian stocks that offer higher returns.

In just one week in early February, they snapped up 2 trillion yen of foreign bonds and 450 billion yen of foreign stocks.

Will the scale of buying help to propel regional stock markets to a fresh bull-run?

Hard to say.

But anecdotal evidence suggests that rather than stowing their money in an expensive safe back home where it earns no returns, Mrs Watanabe - the quintessential Japanese housewife investor - is sensibly opting for yields overseas.

That may be one unusual but much welcome outcome, from a regional perspective, springing from the BOJ's latest efforts to reflate the deflation-ridden Japanese economy.

engyeow@sph.com.sg