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Currencies

SoftBank risks triggering yen rally with T-Mobile share sale

Coronavirus-induced retreat of Japan's foreign investments adds pressure on currency

SoftBank Group CEO Masayoshi Son: The Japanese tech group may be on the verge of unwinding a massive U.S. investment.    © Reuters

TOKYO -- SoftBank Group's planned 4.5 trillion yen ($41.9 billion) asset sale has fueled fears in the currency market of renewed volatility in the yen, which has enjoyed relative stability underpinned by aggressive Japanese investment abroad.

Billionaire Masayoshi Son's Japanese technology group said Tuesday it has started exploring options to sell or "monetize" shares in U.S. wireless carrier T-Mobile as part of its asset reduction, which was first unveiled in March.

The move would mark a major reversal in Japanese investment overseas, which has grown by 50 trillion yen over the past five years and served as a check against a rising yen -- a traditional risk for export-driven companies in Japan. SoftBank's announcement comes at a time when manufacturers are weighing changes to their global supply chains in light of the coronavirus pandemic.

"We are on guard for outbreaks in dollar selling," said a currency dealer affiliated with a banking group.

SoftBank, which suffered a nearly 1 trillion yen net loss in the year to March, is looking to cut its debt. The company on Tuesday gave "no assurance" that any transaction would take place involving its T-Mobile stake, worth well over 2 trillion yen. It is also unclear whether such a transaction would entail any dollar-to-yen conversions.

But SoftBank is not the only company suffering a reversal of fortunes in the pandemic. Listed Japanese companies saw net profits fall roughly 30% in the fiscal year to March. Any drop in foreign investment flows would have an effect on exchange rates.

The balance of foreign direct investment by Japanese interests grew to roughly 169 trillion yen at the end of 2019. The flow of outbound investments started rising in 2012 as Japanese companies faced the prospect of a shrinking, graying population at home. Foreign direct investments outstripped foreign securities holdings in 2014.

Unlike securities holdings, corporate acquisitions and similar direct investments usually represent long-term commitments, so the foreign exchange transactions they entail also are not soon unwound.

"The growth in foreign direct investment had become a factor curbing yen appreciation," said Daisuke Karakama, chief market economist at Mizuho Bank. Karakama said the Japanese currency, a traditional safe haven in times of uncertainty, had weathered periods of investor risk aversion with relative stability in the recent past.

In response to the coronavirus pandemic, central banks around the world have cut interest rates, widening cross-border yield spreads. The spread between Japanese and U.S. long-term interest rates amounted to roughly 0.7 percentage point on Wednesday.

The U.S. Federal Reserve plans to hold policy rates near zero until at least 2022. Bank of Japan Gov. Haruhiko Kuroda said this week he expects Japanese rate hikes to remain a "distant" prospect even in fiscal 2022.

Without a rate spread to drive currency trades, currency market players are instead keeping watch on multinationals and their foreign investments.

History informs this wariness. After the 2008 global financial crisis, the yen surged to painful levels for Japanese exporters. The safe-haven currency hovered at 80 yen to the dollar. Then SoftBank announced on October 2012 that it would buy what was then Sprint Nextel for roughly 1.6 trillion yen.

The anticipated dollar purchase that would finance the deal "was the spark" that finally softened the exchange rate, according to a market insider knowledgeable of the period.

The yen remained largely flat at just over 107 yen per dollar during Wednesday's trading in Tokyo. Because SoftBank is a top client for Japanese banks, financial institutions have tended not to openly touch on the currency implications of the tech group's dealings.

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