Why Japan’s yen shock is rippling across Asian currencies – and what it means for Singapore

[SINGAPORE] It has been less than a week since the first reports of a rare, possible intervention in the yen by US and Japanese authorities emerged.

Since then, the greenback has been in relative free fall – with one major index hitting a four-year low on Wednesday (Jan 28) – and the yen has strengthened considerably against the US dollar.

This has also spilled over into major Asian currencies, with most strengthening against the greenback – including the Singdollar, which on Monday marked an 11-year high.

The Business Times looks at what has happened, why it has affected Asian currencies – and what it all means for Singapore readers.

Why intervene?

On Jan 23, media reports emerged that the New York Federal Reserve had conducted so-called “rate checks” with traders, a move that typically precedes currency intervention.

Rate checks – a rare move – refer to informal inquiries by central banks to gauge market pricing and liquidity conditions ahead of possible action.

The last time the US intervened in the yen was in 2011, after the Tohoku earthquake and tsunami in Japan, when it – along with other nations – sold the yen to help stabilise trading.

One reason for the greenback’s slide is that markets interpret the move as a signal US authorities are uncomfortable with the dollar’s strength. Coordinated intervention – if it happens – involves selling dollars to buy yen, directly adding downward pressure on the US currency.

Since Jan 23, the US dollar index – which measures the greenback against a basket of six major currencies – has fallen 2.3 per cent to 96.10 as at 11.20 am on Wednesday, a mark not seen since February 2022.

Conversely, the yen has strengthened considerably against the greenback, trading at 152.7330 as at 11.20 am, compared with its Jan 22 close of 158.4560.

The Singdollar was trading at 1.2608 on Wednesday morning, compared with its Jan 22 close of 1.2853. Other major Asian currencies, including the Malaysian ringgit and Korean won, have similarly appreciated against the greenback.

What has it got to do with Asian currencies?

A firmer yen typically spills over into Asian currencies “not just because Japan is a top trading partner, but also because it competes directly with some Asian exporters in third-country markets”, said OCBC FX strategists Christopher Wong and Sim Moh Siong.

On a historical basis, the won, Thai baht, ringgit and Singdollar have shown the “highest sensitivity” to when the yen appreciates, they added.

Maybank Singapore’s head of FX research Saktiandi Supaat noted that the spillover into Asian currencies “primarily operates through financial rather than trade channels”, with an uneven impact across the region.

As the yen appreciates, carry trades – where investors borrow in low-yielding currencies such as the yen to invest in higher-yielding assets elsewhere – may unwind.

This is especially so for “high carry, high beta” – in other words, riskier but higher-yielding – Asian currencies, such as the Indonesian rupiah, Philippine peso, won, and, to a smaller extent, the baht, said Saktiandi.

In Japan’s context, the yen has long been a cheap funding currency, so sudden yen strength can force investors to reverse those leveraged positions quickly.

“In contrast, currencies with low carry and strong balance sheets including (the Singdollar) tend to outperform on a relative basis,” Saktiandi explained.

OCBC’s Wong and Sim expect the yen to trade at 153 and 151 per US dollar by end-March and end-June, respectively, while the Singdollar is seen holding at around 1.29 over the same period.

Maybank’s Saktiandi forecasts the yen reaching 148 and 145 per US dollar by end-March and end-June, respectively, with the Singdollar projected to trade at 1.28 and 1.26.

What does a stronger Singdollar mean for MAS?

In the short term, probably nothing. “Market movements on short-term gyrations are not likely to affect policy unless it’s sustained or structural,” Saktiandi said.

Broadly, analyst predictions are that the Monetary Authority of Singapore (MAS) will leave policy levers unchanged at Thursday’s meeting.

“A stronger (Singdollar) is beneficial in terms of imported costs, and MAS’ policy mandate is core inflation,” noted OCBC chief economist Selena Ling. That is to say for Singapore, which imports most of what it consumes, a firmer currency helps dampen the cost of overseas goods and services.

Why does it matter? Singapore manages inflation mainly through the exchange rate, with MAS guiding the Singdollar’s path against a basket of currencies, rather than setting interest rates directly.

“That said, the (Singdollar’s) strength may also influence export competitiveness and attractiveness of Singapore as a tourist destination,” said Ling.

“But the growth trade-offs can be addressed through other means like fiscal policy, plus growth has been turbo-charged by the artificial intelligence-related semiconductor boom, so growth trade-offs are less of a concern,” she added.

Why does a weakening US dollar matter to Singapore?

The most obvious impact for someone who deals in Singdollar terms – be it investment giant Temasek or the everyday retail investor – is that a weakening US dollar means US-denominated returns erode once converted back into Singdollars.

Temasek chief Dilhan Pillay has spoken about the slide in the greenback eroding returns on more than one occasion.

For companies dealing in both the Singdollar and greenback, such as manufacturers and import-export players, “margins could go both ways or even remain stable depending on the sales and cost mix”, noted Lorraine Tan, director of equity research in Asia at Morningstar.

“Also, this depends on whether companies pass on any changes and whether they have hedged their currency exposure,” she said. “However, we tend to see prices are sticky when it comes to downward adjustment, so I imagine that it’s more likely to see some pressure on margins first.”

OCBC’s Ling said that for everyday Singaporeans, the Singdollar’s strength is “beneficial” when buying imported goods and travelling overseas for holidays.

Said Tan: “For those living in Singapore for the long term, the safest bet remains to keep more exposure to the (Singdollar) – whether savings or investment.

“There may be short-term fluctuations but over the long term, we see more upward risk for the (Singdollar) than downward.”