Tourists, M&A and a big bet on the yen

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For some decades, Hawaii has been a favourite playground for Japanese tourists, consistently in the top three most visited overseas destinations and the go-to spot for golf-tours, group getaways, marriage proposals and honeymoons.

But this is less so now, and the dollar-yen exchange rate bears much of the blame. Hawaiian trips by Japanese have resumed since the pandemic, but as a shadow of their previous level. Daily passenger arrivals throughout 2023 were mostly well below the 3,000 mark, while in 2019 they were mostly above 5,000. 

Two charts tell the story of what might, on one reading, be a bold currency bet based on this. The first is the dollar-yen exchange rate — a line that tracks the yen, in early 2022, broke out of the narrow trading range it had occupied since 2016 and fell towards the multi-decade lows of about ¥150/$ where the Japanese currency sits today. The cheap yen has had a positive effect on the profitability of many Japanese companies, it has fuelled food and energy inflation but, crucially for Hawaii, it has made a dollar-denominated holiday feel punishingly expensive.

The second chart shows the share price of Hawaiian Holdings — the parent of Hawaiian Airlines. Its profitability has historically hinged on the once reliable Japanese yearning to visit the Aloha state and is now suffering as cost concerns have tempered that. Between the start of 2023 and the end of November, Hawaiian Holdings shares lost more than 65 per cent of their value. They did not rebound from that 10-year low until, in December, Alaska Air proposed a merger.

Line chart of ¥ per $ showing Yen has sunk to a multi-decade low

The success or failure of that deal continues to rest with US regulators, but there are plenty of investors who see the approach as opportunistic. Hawaiian was hurting terribly and Alaska pounced.

Alaska may not think about the deal in these exact terms, but this is a move where currency could prove a huge sweetener. If the yen starts to strengthen, and perhaps returns to the ¥130-¥120 territory that it occupied a couple of years ago, a Hawaiian holiday might swing quickly back on to the Japanese wish list.

According to current market chatter, the notional bet that Alaska is taking is something of a no-brainer. More and more investors, say foreign exchange analysts, like to talk about the dollar-yen rate as an asymmetric trade: at about ¥150/$, all the risk for the yen, according to the emerging consensus view, is that it will move higher, and the downside is artificially limited. 

Markets have seen over the past couple of years what happens when the yen starts to move too hard and fast below ¥150/$. Imported energy and food inflation hits ordinary Japanese households. The Japanese authorities start to intervene verbally to support the currency, and will ultimately pledge to do “whatever is necessary” to prevent an outright rout.

On the upside, meanwhile, the Bank of Japan has been clearly signalling its intention to “normalise” its monetary regime and finally jettison the policy tools (negative interest rates and yield curve control) that were so symbolic of abnormal times. Once the BoJ is no longer the sole major central bank still locked in ultra-loose mode, runs the argument, a revaluation of the yen will come due.

Line chart of Hawaiian Holdings, $ per share showing Hawaiian Airlines suffers in the wake of weaker Japanese tourism

This idea of asymmetry is seductive as a theory, but the trade it implies does not yet look crowded, say analysts. In the simplest terms, a straight bet on a stronger yen at this point requires an investor to hold yen that in effect yield nothing in favour of dollars yielding the Federal Reserve’s 5.5 per cent. The yen would have to move a lot for the bet to be worth it, and the momentum would have to be more obvious.

But there are other flaws. First, the BoJ has begun signalling that “normalisation” does not, in any immediate sense, open the gates to progressive interest rate rises. Second, the Japanese authorities have yet to emit any discernible sign of dismay as the yen has sunk from ¥141/$ at the start of January to ¥149.5 on February 9.

A third and still unquantified factor is the potentially large yen-selling pressure created by the January 1 expansion of Japanese government’s tax-exempt investment accounts. Brokers confirm that individuals have been pouring new money into them, but that as much as 80 per cent of the flows are going to yen-denominated products that give exposure to US and other foreign equities. Institutions, on behalf of retail investors, have turned yen sellers to acquire the underlying dollar assets.  

There may come a point where the asymmetric yen trade becomes obvious, and then Hawaii can start planning for the great return of Japanese tourists. We are not there yet.

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Financial Times

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