Against the strengthening US dollar currencies around the world have been losing value and the Japanese Yen has felt the brunt of it more than most. In fact, earlier this year the yen hit a 38-year low against the greenback and it’s currently sitting about 15 percent lower now than it was at the start of the year.
Similarly, the Vietnamese dong has also devalued, but only by about 4.5 percent since January 1. This has been on the back of efforts by the State Bank to keep the local currency from devaluing further against the US dollar by issuing treasury bills and burning through its US dollar and gold reserves.
On the one hand, this has supported local businesses that rely on imports, like fuel for example. On the other hand, however, it has seen a gap open up between the yen and the dong by just over 6 percent. This could be problematic in that the economies of Japan and Vietnam are intricately interlinked and a divergence of these two currencies could have broad ramifications.
For example, this means Vietnam’s exports to Japan are becoming more expensive and this could mean Japanese consumers start buying less.
Of note, Japan is Vietnam’s fourth biggest trading partner after the US, China, and South Korea with two-way trade in the first six months of this year a little over US$13.3 billion. This was only about a fifth of the US$65.6 billion of trade between Vietnam and the US but is still a substantial volume of trade.
But it’s not just about trade.
Remittances from Japan also play a substantial role in Vietnam’s economy. Around half a million Vietnamese are working in Japan at any one time, about a quarter of Japan’s foreign worker workforce. These workers frequently send the excess money they make home. In fact, remittances from Japan were worth roughly US$1.5 billion in 2023, according to data from the World Bank Group (working on the assumption that a quarter of Japan’s outflows go to Vietnam). That same, US$1.5 billion as of June 30, however, would have bought about six percent fewer Vietnamese dong or about US$90 million less.
But whereas it makes sense for Vietnamese workers to hold on to their yen, on the flip side, it makes sense for Japanese businesses holding dong in Vietnam to repatriate their profits sooner rather than later. For stock traders, in particular, their investments, based solely on the change in the two currencies, have increased by 6 percent. A decent return over just six months.
With this in mind, it’s also worth noting that Japan is one of Vietnam’s biggest foreign direct investors.
By the end of June, the Land of the Rising Sun had pumped US$1.7 billion into Vietnam in foreign direct investment this year alone. A significant fall from the US$2.2 billion over the same period last year but a decent sum nonetheless.
That factory, however, that was originally budgeted to cost ¥100 million a year ago, paid at today’s exchange rate, would cost ¥106 million. It should be noted too, that though two-way trade between Vietnam and Japan is much lower than between Vietnam and the US, in terms of foreign direct investment, Japan is leaps and bounds ahead–last year Japan’s foreign direct investment in Vietnam totalled US$6.56 billion. For the US, for comparison, it was barely US$626 million.
That is not to mention Japan’s overseas development assistance or ODA.
Last year, it was estimated that the official ODA from Japan to Vietnam could hit US$674 million in the year to March 31, 2024. This would make Japan the biggest provider of ODA to Vietnam. Japan has in the past used ODA to build infrastructure and invest in healthcare, along with a broad number of development projects. Whereas a devalued yen will make paying back ODA loans easier, development agencies will get less bang for new ODA loans.
All of that said, whereas the yen and the dong might have diverged in value they are both still together on the US Treasury’s currency manipulator watchlist. Both currencies have earned their places on the list “for having a significant bilateral surplus and a material current account surplus”.
On that note, The Economist’s Big Mac Index, a bit of fun to be sure, but not without some merit, found in January that, adjusted for GDP, the Japanese yen was undervalued against the greenback by 43.1 percent and the Vietnamese dong, also against the US dollar, undervalued by 33.1 percent. This does not bode well for either currency in future US Treasury assessments.
That said, it’s difficult to determine exactly how much the disparity between the dong and yen has been driven by the falling yen versus the propped-up dong and notably, there are a myriad of factors that go into pricing a currency. However, the point here is that currency interventions do not exist in vacuums, in fact, it’s very much the opposite with the way a currency behaves having broad knock-on effects.
In this instance, keeping import prices down may be coming at a cost to an economic relationship that goes well beyond simply two-way trade. That said, this is still a relatively fresh development and largely at the mercy of the global economy. In this light, individuals looking to keep track of how these three currencies continue to interact moving forward should make sure to subscribe to the-shiv.