CHF/JPY

The Japanese and Swiss economies share some fundamental characteristics. Both nations have few natural resources and both must import energy needs. Both nations are export economies and both nations are sensitive to currency exchange rates with major trading partners. In fact, the health of both national economies depends on export price stability. Last, but not least, the Yen and the Franc are both considered safe haven currencies.

So it stands to reason that the central banks of both nations would have similar goals. However, for reasons which are baffling most economists including Bank of Japan Governor Haruhiko Kuroda, the Japanese Yen continues to strengthen against the currencies of its major trading partners.

It’s important to note here that Japan and Switzerland engage in very little bilateral trade. About 0.56% of Japanese exports are destined for Switzerland and about 2.3% of Swiss exports are destined for Japan. So it may be assumed that the central bank policy of one, is not a major concern of the other.

The Swiss National Bank has done about everything it can do to weaken its currency and makes no secret about it: it has been a stated goal for well over a year and particularly targets the ‘safe haven’ dimension of the Swiss Franc. In its most recent policy assessment meeting[i] the SNB clearly notes that “…The Swiss franc is still significantly overvalued. Negative interest is making Swiss franc investments less attractive. At the same time, the SNB will remain active in the foreign exchange market, in order to influence exchange rate developments where necessary…

Further, the SNB clearly makes clear its concerns as to what extent the ‘significantly’ overvalued Franc is having on the economy: “…annualised real GDP increased by 1.7% in the fourth quarter. Thus, for 2015 as a whole, the Swiss economy recorded growth of just under 1%… …Profit margins are still under pressure at many companies, and the willingness to invest and the demand for labour remain commensurately subdued. Consequently, the unemployment rate has risen again slightly in recent months…

The SNB has suppressed rates about as far as rates can be suppressed for this economy: “…The target range for the three-month Libor remains at between –1.25% and –0.25%, and interest on sight deposits at the SNB is unchanged at –0.75%…

CHF JPY Price Event Chart

It is said that in every cloud may be found a silver lining and indeed as the above chart indicates, over the past year the Swiss Franc has weakened dramatically against the Japanese Yen. The Yen low was attained 22 June, 2015 at ¥134.008 per Franc to its current 3 June high of ¥109.724 per Franc; a 17.5795% decline. Since the 2015 low, the Yen has continued to gain. So the SNB has been successful at least with respect to the Yen.

This substantial weakening of the Franc against the Yen is in spite of the fact that the BOJ has been doing all it can do to achieve the same goal as the SNB: weaken a too strong Yen. In the 29 January BOJ policy statement[ii], “…The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank… …The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen… …The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 billion yen, respectively…” Each of the changes in policy will force more liquidity into the system. The BOJ is usually formulaic in its wording, but the fact that the Japanese economy depends on export price stability can’t be ignored.

On 1 June, Japanese Prime Minister Shinzo Abe announced his cabinet’s decision to delay the implementation of a long awaited consumption tax and also announced an expansion of the existing stimulus program. The prime Minister also express his concerns of potential deflation, should these action not been taken. The Prime Minister also cited continued economic weakness in China, a top trading partner, as well as in emerging market economies[iii]. However, the Yen continues to gain against the majors. (Recently analysts have been expressing concerns over possible Japanese ‘helicopter money’; however, Japan’s economic governors are a bit more sophisticated than that).

So the question is, where are these capital inflows coming from and why the Yen instead of the Franc? It’s a bit of conjecture, but one must keep in mind that China’s rise to a global economic power occurred well within the lifetimes of many individuals who now have accumulated personal wealth beyond imagination of just, say, 20 years ago. Consider this: New Zealand and Australia have the best high quality rated overnight deposit facility rates in the Asia-Pacific. Arguably, there’s little chance of their central banks defaulting on credit and even if they cut rates 25 basis points at a go, there’s still room to remain positive. It’s just conjecture, but might it be a case of China’s new middle and upper classes not feeling comfortable with the western banking system? Again, the PRC and the west were at significant odds just two decades ago and still are over several issues. Further, China’s new wealth classes are well aware of the use of ‘sanctions’ when political disagreements with western governments reach an impasse.

The point is that there are far stronger capital investment, trade and economic ties and fewer political-economic issues with Japan compared with Europe and the US. (Or at the very least, perceived that way)Thus, the Yen is the safer, safe haven currency than the Swiss Franc, or Aussie, Kiwi, Euro, Sterling or Dollar. This might go a long way towards explaining the continued strength of the Yen against the majors in spite of BOJ easing or government stimulus programs.

If this is the case, plus having the SNB firmly committed towards weakening the Franc, it’s difficult to see the Franc gaining on the Yen anytime soon, except for the occasional intervention reaction.

 

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[i] SNB Press Release 17-3-2016

[ii] BOJ Press Release 29-1-2016

[iii] FT 1-6-2016