Japan’s Industrial Output and Yen Rise Amid Global Uncertainty
Japan, the world’s third-largest economy, has shown signs of resilience and recovery in the face of the ongoing COVID-19 pandemic and geopolitical tensions. The country’s industrial output rose for the second consecutive month in November 2023, beating market expectations and reaching the highest level since February 2020. Meanwhile, the yen, often regarded as a safe-haven currency, has gained strength against the dollar and other major currencies, as investors seek refuge from the volatility and risks in the global markets.
Industrial Output Surges on Robust Domestic and External Demand
According to the Ministry of Economy, Trade and Industry (METI), Japan’s industrial production index increased by 1.4% month-on-month in November 2023, following a revised 2.9% rise in October 2023. The index measures the output of the manufacturing, mining, and electricity sectors, and is a key indicator of the health of the industrial sector. The November figure surpassed the median forecast of a 0.9% increase by analysts surveyed by Reuters.
The increase in industrial output was driven by robust demand from both domestic and overseas markets, as Japan’s economy gradually reopened after the state of emergency was lifted in September 2023. The main contributors to the output growth were the production of general-purpose and electrical machinery, transport equipment, and information and communication electronics equipment. These sectors benefited from the recovery of consumer spending, business investment, and exports, especially to China and the United States, Japan’s largest trading partners.
The METI also released its forecast for the industrial production in the coming months, based on a survey of manufacturers. The forecast showed that the output is expected to rise by 2.2% in December 2023 and by 1.8% in January 2024, indicating a sustained momentum for the industrial sector.
Yen Strengthens on BOJ’s Policy Hints and Risk Aversion
The yen, which is widely regarded as a safe-haven currency due to Japan’s current account surplus and low inflation, has appreciated against the dollar and other major currencies in recent weeks, as investors sought refuge from the uncertainty and risks in the global markets. The yen has gained more than 4% against the dollar since the beginning of December 2023, reaching a four-month high of 144.23 on Friday, December 8, 2023.
One of the factors behind the yen’s strength was the comments made by the Bank of Japan (BOJ) Governor Kazuo Ueda on Thursday, December 7, 2023, which sparked speculation that the central bank may soon phase out its ultra-loose monetary policy. Ueda said that the BOJ had several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory, and that the BOJ would not hesitate to adjust its policy if needed. Markets interpreted these comments as the clearest sign yet that the BOJ may be preparing to taper its massive stimulus program, which has kept the yen weak for years.
Another factor behind the yen’s strength was the risk aversion among investors, amid the rising COVID-19 cases and deaths in Europe and the United States, the uncertainty over the outcome of the U.S. debt ceiling negotiations, and the geopolitical tensions between Russia and Ukraine, and between China and Taiwan. These factors have dampened the appetite for riskier assets, such as stocks and emerging market currencies, and boosted the demand for safer assets, such as bonds and the yen.
Outlook for the Future
The outlook for Japan’s industrial output and yen remains positive, as the country’s economy is expected to continue its recovery from the pandemic-induced recession, supported by the vaccination program, the fiscal stimulus, and the external demand. However, there are also some downside risks that could derail the recovery, such as the emergence of new variants of the virus, the slowdown of the global growth, and the potential policy shifts by the BOJ and other major central banks.
The industrial output is likely to maintain its upward trend in the coming months, as the domestic and external demand remains strong, and as the supply chain disruptions ease. The METI’s forecast of a 2.2% increase in December 2023 and a 1.8% increase in January 2024 suggests that the industrial sector will end the year on a high note, and start the new year with a solid footing. However, the output growth may face some headwinds from the rising energy and raw material costs, which could squeeze the profit margins and the competitiveness of the Japanese manufacturers.
The yen is likely to remain strong against the dollar and other major currencies, as the BOJ’s policy hints and the risk aversion continue to support the safe-haven appeal of the currency. The yen may test the 140 level against the dollar in the near term, as the markets anticipate a possible policy change by the BOJ in the next monetary policy meeting on December 21, 2023. However, the yen’s strength may be limited by the divergence of the monetary policies between the BOJ and other major central banks, such as the Federal Reserve and the European Central Bank, which are expected to tighten their policies sooner than the BOJ.
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