The Yen has weakened against the US$ since the Iran war drove the oil price higher, but so too has the AU$. Japan imports most of its energy needs, so a roaring oil price hurts the terms of trade and can put pressure on the economy as consumers take a hit in the wallet and manufacturers’ costs increase. This is particularly the case as LNG imported from Australia is also linked to the oil price.
Australia, on the other hand, is a substantial net energy exporter, and its exports are assisted by the closure of the Strait of Hormuz. Indeed, Japan recently asked Australia to increase its LNG production as 6% of its supply comes via the Strait of Hormuz.
So why are the currencies weakening in lockstep, despite the Reserve Bank raising rates on 17 March?
The answer is, because the ultimate source of both countries’ petroleum products is the Middle East, much of which comes via the Strait of Hormuz. However, that is only part of the answer. Japan should be much more negatively exposed to this dynamic than Australia.
The key difference between the two countries is Japan’s risk aversion and forward planning. Japan has almost 260 days’ worth of petroleum reserves between private and public stockpiles. Australia has around four weeks only. Australia is already experiencing shortages of diesel as farmers and others panic-buy.
Meanwhile, Japan sits relatively comfortably. We talk a lot about too much aversion to risk-taking at the corporate level, and justifiably so when companies are saving up years’ worth of shareholders’ cash for a rainy day. Occasionally though, what usually seem to be overly cautionary measures appear prudent. Particularly when compared with the absolute disregard of Australia and fellow just-in-time-oil-inventory practitioner, New Zealand, for the precarious nature of their crucial supply chains amplified by a lack of domestic refining capability.
