Foreign tourists have been flocking to Japan to take advantage of the weak yen — providing a boon to Japanese retailers — but they might think twice about making a trip if the currency’s value continues to appreciate.
The yen’s value has grown 10.8 percent against the dollar and 9.6 percent against the yuan since the beginning of the year. A jump in value against the yuan is worth watching as Chinese tourists become an increasingly important part of Japanese retailers’ customer base. The rise against the dollar is bad news for Japanese exports, a key driver for the economy.
At least one Japanese retailer is starting to feel the pinch. Last week, Uniqlo’s corporate parent Fast Retailing lamented the effects of the yen’s appreciation and partially blamed the currency’s rise in value for its 55.1 percent plunge in first half net profit. A weak yen helped boost business in the year-earlier period.
Last year the number of foreign visitors to Japan increased 47.1 percent over 2014 to a total of 19.74 million, according to preliminary figures released by the Japan National Tourism Organization. While growth is seen slowing this year, the numbers are still expected to be greater than in 2015.
But if Japan becomes a more expensive destination, tourists could opt to go elsewhere. Meanwhile, a host of other destinations around the world are competing for cash-rich Asian tourists. Last month, DFS opened a T Galleria duty-free department store in Siem Reap, Cambodia for example.
Despite the currency’s rise, FX analysts at Nomura said last week that they believe imminent FX intervention from the Japanese government is unlikely — although the likelihood would increase if the U.S. dollar-to-yen rate falls sharply below 105. It currently stands at 109. At the same time, the bank’s analysts suggested that Japanese policymakers may also already be in negotiations with U.S. authorities on the issue.
“For Japan to gain approval from the [U.S.] to intervene in the market, it will be important for Japanese policymakers to decide on fiscal and monetary stimulus to show its own efforts to boost the Japanese economy before relying on intervention to weaken [the yen]. If Japanese data are expected to weaken further this should also help justify [yen] selling intervention,” they said.
Goldman Sachs analysts also expressed doubt over whether the Japanese government will resort to currency intervention.
“FX intervention faces severe political obstacles, and the adverse reaction to the negative rate policy makes it difficult for the BOJ to take further rate action, at least in the near future, in our view. [Japanese Prime Minister Shinzo Abe’s economic policy, or Abenomics] stands at a critical crossroad,” the analysts said last week.