Equities markets just took a hammering, they’re all very ugly this morning, why? This is a Japanese YEN story, after 40 years of remaining weak, YEN finally strengthened and in doing so it has wreaked havoc on markets and the story is only just starting to unfold.

The YEN has been flat as long as most people can remember, this is because successive Japanese governments believed a stable currency and zero inflation were more important than competitiveness. If you had savings in Japan, there wasn’t much you could do with them since BOJ rates were nearly always negative, that means nobody paid interest on savings, the best you could do is buy low return BOJ bonds which of course BOJ loved to death. Consequently, overseas manufacturers such as the big car companies, didn’t repatriate their earnings and instead, kept them in other economies, such as in Thailand for example.

One bi-product of a flat stable currency such as YEN is that many people used it to finance what is known as the “carry trade’, which involves borrowing in a low yielding/ low cost currency to finance investment in another currency that offers a much higher return, eg, USD.

All of these things are fine(ish) except it means that BOJ accumulates debt at a rapid rate and future liabilities such as pensions rapidly become unfunded (not under funded, unfunded) and unsustainable. For example, Japan has the third largest GDP ranking globally but their debt to GDP ratio is over 240%. In a country which has an ageing population, future social care and pension liabilities are like a stick of dynamite with a burning fuse!

Fast forward to where a maverick Finance Minister decides it’s time for the YEN to strengthen and takes steps to make it so, and defends the YEN on international markets, pushing its value higher by buying ginormous amounts of the currency. At first, nobody cares, markets don’t care because they think it will have no impact and that the YEN will never strengthen. The suddenly, whoopsie daisy, YEN starts to strengthen and all heck breaks loose.

Those people who bet money of YEN futures, lost; those people who borrowed YEN to invest in USD lost; that borrowed USD that was invested in equities markets suddenly had to be sold and turned back into a strengthening YEN, quickly, lost. AND, car companies like Toyota and Honda Thailand, that hold trillions in earnings in Thailand, start to think about converting it back into YEN and sending it home to Japan. If that happens, capital outflows on that scale will mean that Thailand will also loose and THB will plummet in value.

Of course, all of this may just be a storm in a Japanese tea cup, or, it may be the start of something much bigger. Stay tuned.

'shitting money' as it were? 

The Japanese car companies appear to be locating their EV companies in Japan, that will reduce their business in Thailand. Not surprising really, Japan has just confirmed the existence of enough cobalt and nickel to make batteries for the next two decades. Already, Honda has said they will close down the Ayutthaya plant in 2025 and nothing will replace it.

"World-Lagging Thai Stocks See Investors Moving Money Into Regional Rivals
For years, Thai equities stood tall as one of Southeast Asia’s largest stock markets. That bullish story is fast unraveling".



www.bangkokpost.com/business/investment/2836713/world-lagging-thai-stocks-see-investors-moving-money-into-regional-rivals

The Baht is too strong for exporters

www.channelnewsasia.com/business/thai-baht-too-strong-and-impacting-exports-minister-says-4610846