Global Market: Japanese businesses turn to currency hedging as weak Yen drives up import costs

Japanese businesses are increasingly turning to longer-term supplier agreements and currency hedging as the yen's prolonged weakness raises the cost of imported goods and makes it harder to predict expenses.

The weakening yen has made imports increasingly expensive, prompting the companies to seek longer-term contracts that lock in prices and exchange rates for up to a year.

According to Reuters, the approach provides greater visibility over costs and allows the companies to delay price increases that could otherwise hurt customer demand.


Read more: Global Market: Japanese bond yields edge higher as US Treasury yields, oil prices rise

The pressure reflects the yen's broader decline. The Japanese currency has weakened despite government intervention in the foreign exchange market in 2022, 2024 and 2026, while coordinated U.S.-Japan purchases in July and August have also failed to provide lasting relief.

Yen has lost more than 30% against the dollar over the past five years, making it the weakest-performing G10 currency over that period. The currency fell to nearly 164 per dollar in July, its weakest level in almost four decades, before authorities intervened. It was trading near 159 per dollar most recently.

Businesses seek protection from further yen weakness

The prolonged decline is forcing companies that have traditionally absorbed moderate increases in import costs to reconsider their approach. Bankers told Reuters that more Japanese firms are now using forwards, futures and options to protect themselves against additional currency losses.

Daiwa Securities has reported a sharp increase in demand for currency hedging, while Bank of America has expanded its Japan foreign-exchange team over the past two years to meet rising demand.

The shift is also extending the duration of hedges. Some Japanese companies are now seeking to lock in exchange rates for as long as five to 10 years, compared with the shorter hedging periods that were more common previously.

The changing strategy reflects growing concern that the yen may not return quickly to its previous levels. Companies are increasingly preparing for continued currency volatility rather than assuming that the yen will recover.

Importers face mounting pressure

The weaker currency has particularly affected companies dependent on overseas supplies.

Nitori Holdings, Japan's largest furniture retailer, is another example of the impact. The company sources a significant portion of its products from overseas and estimates that a one-yen rise in the dollar-yen exchange rate reduces its profit by around 2 billion yen, or approximately $12.5 million.

Nitori does not currently hedge its currency exposure but could consider using forward contracts if the yen remains extremely weak for an extended period.

Exporters also seek greater certainty

A weaker yen continues to benefit Japanese exporters and companies with overseas earnings because foreign revenue translates into more yen and Japanese products remain relatively competitive abroad.

However, even exporters are increasingly looking for protection against unexpected currency movements. Bank of America said some exporters are considering hedging against a stronger yen to secure the value of their overseas earnings.

The yen's weakness has been driven partly by Japan's relatively low interest rates and the Bank of Japan's gradual pace of monetary tightening. Concerns over Japan's debt burden under Prime Minister Sanae Takaichi have added to investor uncertainty.

Markets remain divided over the yen's outlook

Foreign-exchange markets are showing some signs of changing expectations following official intervention and a shift toward a more hawkish outlook for Japanese interest rates. Short-term options have become more expensive for investors seeking protection against a stronger yen.

However, longer-dated options markets have shown much less movement, suggesting that investors remain cautious about declaring a lasting turnaround in the currency.

Reuters reported that market participants continue to see a broad dollar-yen range around 155 to 165 as a likely scenario, reflecting expectations that authorities may resist a major decline below 150 but may also struggle to engineer a sustained yen recovery.

For Japanese companies, the uncertainty is becoming a business problem rather than simply a market issue. As the currency remains volatile, businesses are increasingly choosing to secure exchange rates and import costs in advance, marking a shift toward longer-term financial protection against yen swings.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times.)