Is Japanese yen next corona victim?

As tensions mount in the financial world, the Japanese yen is often a good hiding place. In recent weeks, however, little has been noticed. A VAT hike hurts the currency at least as much as the corona virus.

Concerns about the rapid spread of the coronavirus are making themselves felt in the financial world. Most stock indices have fallen 5% or much more in recent days. Investors seek the safety of investments that retain their value in uncertain times. Good examples are gold, government bonds from solid countries like Germany and currencies like the dollar and the Swiss franc.

The yen can almost always be added to that list. But this time, the Japanese currency also takes a big hit. In the first three weeks of February, the yen has fallen more than 3% against the dollar. What is hidden behind that striking movement?

Sensitive moment
Part of the price decline is in fact the result of concerns about the corona virus. After China, Japan is the country where the most infections were initially discovered. However, that number has not increased rapidly in recent weeks. Thursday morning the counter stood at 207. That is considerably less than South Korea (1.766) or Italy (470).

The Japanese economy is indirectly strongly affected by the outbreak. China is by far the most important trading partner. Japan is also a popular destination for Chinese tourists, who are now staying at home en masse. According to the Japanese tourist board, in the period to the end alone, more than 400.000 Chinese will cancel their vacation to Japan. Moreover, the economic slowdown that is now emerging comes at a very sensitive time.

Economy in full swing
Last week it was announced that the Japanese economy shrank by more than 2019% in the last quarter of 6. This sharp drop came as no surprise. In October last year, VAT in the country was increased from 8% to 10%. The Japanese have already made as many large purchases as possible, such as cars and white goods in previous months, to avoid having to pay the higher price.

With an earlier VAT increase in 2014, the Japanese economy already entered a recession. This is now in danger of happening again due to the coronavirus. With the yen dropping to its lowest level in nearly a year, the currency world is already graduating for it.

hit it hard
The sharp blows to the yen are not a signal that the currency has lost its safe haven status. But it is an indication that the currency world cannot always fall back on the currency in uncertain times. Although the corona outbreak is a temporary phenomenon, it is possible that the Japanese VAT will rise further in the future.

The country is struggling with an aging population and a huge public debt. In order to be able to repay this, the government must maintain the level of income or, preferably, increase it considerably. The OECD even advised Japan to gradually increase VAT from 20% to 26%. If Prime Minister Shinzo Abe follows that advice, the yen will continue to take a lot of blows in the future.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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