New Unexpected Challenge 'Weak Yen', Prolonged Impact on 'Steel and Machinery'

Japanese Yen and US Dollar
Photo by Yonhap News

[Asia Economy Reporter Hwang Junho] Recently, the Japanese yen surged to the 120-yen level per dollar, the highest since 2015. Since the fourth quarter of last year, it had been trading within a box range in the low to mid-110 yen range, but suddenly showed a sharp rise. On the 26th, concerns were raised that a continued weak yen could negatively impact South Korea's machinery and steel industries.

Shinhan Financial Investment Research Center identified two main causes of the yen's weakness in its 'Economic Analysis' released that day.

First, the asynchronous monetary policy stances between the U.S., which has indicated the possibility of seven interest rate hikes within the year and the start of quantitative tightening in May, and Japan's monetary policy stance were cited as causes.

While the U.S. is taking measures to curb inflation approaching 8%, Japan is implementing monetary policies to prevent deflationary pressures. Unlike advanced countries such as the U.S., Japan still requires economic stimulus, so the need for policy normalization to stabilize prices is lower. Reflecting concerns over the divergence in monetary policies between the U.S. and Japan, the U.S.-Japan interest rate differential surged by more than 50 basis points in March alone, and the yen/dollar exchange rate rose accordingly.

Japan's high dependence on energy imports also stimulated the yen's weakness. Due to the sharp rise in energy prices that began in earnest at the end of last year, the trade deficit deepened, raising doubts about the yen's value as an asset. Japan recorded trade deficits for seven consecutive months starting from August last year, and in January, the deficit reached 2.2 trillion yen, surpassing the highest level since 2014. In contrast, the U.S. transformed into a net energy exporter since the early 2010s. Rising energy prices can actually have a favorable effect on the trade balance. The recent rise in energy prices has been favorable to the dollar's value but negative for the yen's value.

The outlook is not very bright either. The U.S. monetary policy is expected to maintain a hawkish stance, so pressure on yen weakness is likely to continue. Even if the Russia-Ukraine conflict ends, it is expected to take time for the inflationary trends in energy and grain prices to subside. Shinhan Financial Investment's analysis is that this continuously increases the possibility of worsening Japan's trade deficit, which supports the yen's weakness.

For these reasons, if the weak yen phenomenon prolongs, it is expected to affect the domestic stock market as well. Researcher Kim Chanhee of Shinhan Financial Investment said, "If the weak yen continues into the second half of this year, there is a possibility of damage to certain sectors in the domestic stock market," identifying "industries such as petroleum, steel, machinery, and automobiles, which have a high level of export competition with Japan or have expanded further." He added, "The delay in investment execution by both government and private sectors due to external economic uncertainties also supports the possibility of damage to sectors like steel and machinery." However, he explained, "Sectors such as petroleum and automobiles, which have favorable forward demand, may experience limited damage," noting that "the petroleum industry can expect benefits from rising raw material prices, and the automobile sector has an advantage in price negotiations due to the gradual easing of supply chain disruptions."

This content was produced with the assistance of AI translation services.