- Unexpected FX intervention unlikely to change the recent trend in the FX markets — "The Ministry of Finance intervened in the foreign exchange market this week. The unexpected action pushed the yen down by about 3-4 yen to both the US dollar and euro. Yet, compared with the second-quarter average, the yen is still 4-7% stronger. Moreover, the yen-selling intervention is unlikely to change the recent trend in the FX markets given that the ongoing yen strength against both currencies stems from external factors, including the slowing U.S. economy, expectations for additional easing measures from the U.S. Fed and a sovereign crisis in the Euro area."
- A higher yen’s short term impact: Corporate profits are influenced — "In this backdrop, there is a persistent concern that the yen’s strength will affect the Japanese economy in the short term through a negative impact on corporate profits. The higher yen has a negative impact on corporate profits in the exportoriented sectors including production machinery, electrical machinery, information and communication electronics equipment, transportation equipment and general-purpose machinery. In contrast, sectors in which crude oil and natural gas take up a high percentage in total raw materials, namely, petroleum and coal products, electricity, and gas, heat supply and water, should benefit from the rising yen."
- A higher yen’s medium term impact (1): An accelerating ascent of the overseas production ratio in manufacturing — "As yen appreciation continues, the attention is also shifting gradually to a medium term impact on the Japanese economy. In the past, a sharp yen appreciation has hastened manufacturers to shift their production overseas with roughly a 2-year time lag. In fiscal 2010-2012, the overseas production ratio may rise at a pace about 2.4 times as fast as the average in the past (a 0.7ppt rise per annum)."
- A higher yen’s medium term impact (2): Domestic capex as well as domestic employment in manufacturing will likely stagnate — "In the past, a rise in the overseas production ratio in manufacturing has pushed down manufacturing domestic business investment and employment by around 1.9ppt and 1.0ppt per annum, respectively. The downward pressure may increase 2.4 times as large as before."
- A higher yen’s short term impact: Corporate profits are influenced — "In this backdrop, there is a persistent concern that the yen’s strength will affect the Japanese economy in the short term through a negative impact on corporate profits. The higher yen has a negative impact on corporate profits in the exportoriented sectors including production machinery, electrical machinery, information and communication electronics equipment, transportation equipment and general-purpose machinery. In contrast, sectors in which crude oil and natural gas take up a high percentage in total raw materials, namely, petroleum and coal products, electricity, and gas, heat supply and water, should benefit from the rising yen."
- A higher yen’s medium term impact (1): An accelerating ascent of the overseas production ratio in manufacturing — "As yen appreciation continues, the attention is also shifting gradually to a medium term impact on the Japanese economy. In the past, a sharp yen appreciation has hastened manufacturers to shift their production overseas with roughly a 2-year time lag. In fiscal 2010-2012, the overseas production ratio may rise at a pace about 2.4 times as fast as the average in the past (a 0.7ppt rise per annum)."
- A higher yen’s medium term impact (2): Domestic capex as well as domestic employment in manufacturing will likely stagnate — "In the past, a rise in the overseas production ratio in manufacturing has pushed down manufacturing domestic business investment and employment by around 1.9ppt and 1.0ppt per annum, respectively. The downward pressure may increase 2.4 times as large as before."
Citigroup_Japan_Macro_Focus_20100917
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