Insight to All Things Currency and Treasury Management

At the end of January, I blogged about the yen and the impact of Japan’s competitive devaluation on multinational corporations. We dubbed the last week in January “yen week” because so many companies were being hit so hard. At the time, the yen had depreciated just over 10 percent against the U.S. dollar, and U.S.-based multinationals were appealing to President Obama to “fight back.”

Fast forward about five months: the yen has now depreciated almost 30 percent against the dollar since its slide began. More than half of the companies reporting negative currency impacts in the first quarter faced headwinds from the yen – particularly in the medical equipment & supplies, scientific & technical instruments, and biotechnology & drugs industries.

Abenomics escalates competitive devaluation

The competitive devaluation of the yen began in earnest when Shinzo Abe was elected prime minister at the end of December 2012; he had campaigned on a promise to revitalize the Japanese economy, in part by devaluing the currency. Since Abe’s election, the yen has indeed slid, setting off a competitive devaluation race to the bottom as an increasing number of countries have felt forced to get into the currency war (in order to maintain the relative competitiveness of their exports – as we explain in this blog post).

Beginning in the first quarter of this year Latin American countries – including Venezuela, Brazil, and Argentina – have joined the global currency war, significantly devaluing their own currencies. We will continue to see the impact of competitive devaluation in Latin America on unprepared corporations through the rest of this year and likely into 2014. And as I wrote in last week’s currency war battlefield report, New Zealand, Australia, and South Korea have also taken action to assuage the impact of yen devaluation. As more and more companies join the fray of the global currency war, volatility will continue to increase.

Corporates: prepare for negative currency impacts to continue

So yen devaluation has significantly impacted corporate financials since the fourth quarter of 2012, and will continue to impact corporates through 2013 and into 2014. And because Abenomics set off a competitive devaluation race to the bottom, corporates are being negatively impacted by currency volatility in other countries as well, including in Latin America.

Combined with an end of quantitative easing in the U.S., devaluation will push the U.S. dollar up against currencies around the world – not only the yen. That means unprepared U.S.-based companies will continue to face revenue losses (dollar up, revenue down).

For investors in U.S. corporations, it is critical to understand that some companies’ earnings per share are being diminished by currency-related losses. These losses can be avoided by using cloud-based technology that helps companies understand where their true exposures lie and manage those risks – across all currency pairs.

So while the yen may be “old news” to some, we are actually not out of the woods yet with regard to the yen. It is and will continue driving competitive devaluation and currency battles around the world.