TOKYO -- The line in the sand in the foreign-exchange market was quickly crossed a few days back when yen bulls put their faith in the
Bank of Japan
, under the auspices of the
Ministry of Finance
, not intervening to weaken the yen.
The line we're talking about is 105 yen to the dollar, which Finance Minister
had been touting as a level that should not be breached under any circumstance. However, the greenback easily fell to a two-month low of 104.12 on Thursday for several reasons, including Japanese corporations hedging against the risk of a further rise in the yen. In addition, U.S. investors were reportedly cooking up a scheme to make a few bucks by riding along with the intervention, if it ever came. If investors who are long the yen can switch their positions and go short by the time the BOJ steps in, they could make a killing. Or so the theory goes.
This kind of get-rich-quick scheme is a little too much for long-term investors to follow on a daily basis, but looking at the fundamental reasons why the yen recently strengthened could actually give investors some hints as to which stocks have the potential to rally.
"Historically, Japan has been exporting its way to a better economy by shipping cars, steel and heavy machinery. However, the government has seen a change in this pattern over the past year, where chipmakers and the high tech industry overall is leading the export market," says Kosuke Hanao, senior manager in the foreign-exchange division at the
Industrial Bank of Japan
That means the government can't really say a stronger yen hurts all exporters, since the demand for IT equipment will outstrip supply, explains Hanao. So even if a strong yen cuts into the profits of, say,
, it won't hurt (and may end up
) chipmakers like
The firms' shares have been doing rather well, with Hitachi rising 17.5% and NEC about 10% over three months, compared with the Nikkei 225 index, which is down about 15% over the same period. Hitachi's American depositary receipts are up more than 18% -- an extra benefit of strength in the yen. Although overall Japanese exports have fallen for the past two months, Ministry of Finance statistics show that exports of electronic parts, including semiconductors, rose 25.2% in May.
Hanao, along with many other currency dealers, now says the government won't intervene as much as it did before, since it no longer has the statistics to back up its strong-yen-equals-weak-economy theory. In addition, the government actually might take to heart a recent report by the
International Monetary Fund
, which said Tokyo succeeded to weaken the yen in only half the cases where the BOJ intervened.
"Market perceptions of disagreements between central banks and the authorities in charge of intervention decision have the potential to mute the effectiveness of interventions," the report said.
Which leads us to the other reason for a stronger yen: the possibility that the BOJ will hike rates as early as this summer. When central banks raise rates, the currency usually strengthens. However, in Japan's case, higher rates could lead to more bankruptcies, as companies that enjoyed paying back loans with zero interest rates will all of a sudden need to find more cash to pay back debt. That, in turn, could weaken the yen as overseas investors lose confidence in Japan's corporate sector.
"Some of our investors are definitely worried about what would happen if the BOJ hikes rates," says Minoru Takata, fund manager at
Partners Asset Management
. "It's more about dampening market sentiment than an actual cut into corporate profit, but nonetheless it is disturbing."