What Singapore Investors Should Know About The Yen’s Recent Rise

The Japanese yen has been climbing against the U.S. dollar of late. The yen started 2016 with an exchange rate against the U.S. dollar of 120.18 and that had weakened slightly to 121.32 by the start of February.

But then, the yen strengthened to 112.67 against the U.S. dollar at the start of March and it is lower than 110 today. All told, the yen had strengthened by over 10% against the U.S. dollar since the start of 2016.

Explaining the yen’s strength

Japan’s central bank, the Bank of Japan, had introduced negative interest rates in February. This means that banks are penalised for keeping excess funds at the central bank, in an attempt to encourage lending. It was also supposed to weaken the yen to help exporters. But as mentioned, the yen had strengthened.

There are three possible reasons for this:

  1. A reluctance by America to raise interest rates at the moment.
  2. Speculators hoping to profit from the difference between Japanese and Chinese interest rates.
  3. The yen’s perceived status as a safe haven.

Gaining strength from the yen

No one knows for sure just how long the yen could maintain its strength. It could be as long as over the next six months, as the Fed continues to look over its shoulder at China.

One Singapore-listed stock, among others, that has exposure to the rising yen is Parkway Life REIT (SGX: C2PU). The REIT has 43 out of 47 of its properties in Japan. A rising yen could mean that when yen-denominated earnings are converted into Singapore dollars, Parkway Life REIT’s profits could be flattered by favourable exchange rates.

Mind you, the yen’s strength might only be temporary, if Asian economies recover. So rather than relying on the strength of one currency over another, a broad-based recovery in Asia could reverse much of the gloom that has descended on many Asian companies including those that make up the Nikko AM STI ETF (SGX: G3B), an exchange-traded fund which tracks Singapore’s stock market benchmark, the Straits Times Index  (SGX: ^STI).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.