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Japanese Yen and Diamond Dollars


Apr 12, 2013 6:00 AM   By Avi Krawitz
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RAPAPORT... Japan’s new government, elected this past December, seems intent on depreciating its ‎currency as a means to stimulate the economy. A weak yen has mixed implications for ‎the diamond and jewelry trade. As a net importer of polished diamonds, and the world’s ‎third largest diamond jewelry consumer market, companies operating there are facing ‎higher costs for their imported goods.‎

But there are opportunities for others in the trade. Recent reports indicate that an ‎increasing number of households are selling their jewelry to capitalize on the recent yen-‎based gold price appreciation. The trend should apply equally to selling their diamonds in ‎the country’s efficient recycled jewelry market.‎

This week, the yen slipped to 99.72, a four-year low against the U.S. dollar, edging ‎toward the 100 barrier that analysts expect is inevitable. The currency has lost about 15 ‎percent in value since the beginning of the year after having depreciated 13 percent in ‎‎2012. ‎

Prime Minister Shinzo Abe seeks to further weaken the yen in a bid to help exporters ‎keep their products competitive and boost profits earned overseas, while continuing to ‎fight deflation that has been prevalent in the past decade. ‎

In the latest attempt, the Bank of Japan announced a stimulus via an aggressive plan to ‎buy Japanese government bonds worth trillions of yen, and raised its inflationary target to ‎‎2 percent from 1 percent. ‎

Analysts at UBS Investment Research expect further stimulus and consequently revised ‎their year-end forecast for the yen to 114 in 2013 and 120 for 2014. "The strongest ‎upside risk to our new USD/JPY forecasts will come if inflation remains stubbornly in ‎deflationary territory despite the Bank of Japan's new easing this month," wrote UBS ‎economist Larry Hatheway. "That will force the central bank to consider buying more ‎assets in future, including equities and even foreign bonds. In those scenarios, USD/JPY ‎ ‎would likely breach its pre-credit crunch 2007 highs of 125."‎

The country’s major exporters, primarily in the auto and electronics industries, stand to ‎gain, and stocks have rallied with the Nikkei 225 up 24 percent so far this year. ‎

But it hasn’t been an easy ride for Japan. Just as the country appeared to be recovering from ‎two decades of recession, the 2008 Lehman crisis knocked it back. Then again, the ‎economy was hurt by the devastating earthquake and tsunami that hit the country in ‎March 2011. ‎

Subsequently, 2012 was a year of ups and downs. Growth resumed in the first half of ‎‎2012, at least compared to the weak comparable period a year earlier, stimulated by ‎rebuilding from the earthquake. But exports and production fell sharply in the second half ‎as the global economy softened due to the European debt problem and as Chinese ‎growth slowed. The Japanese economy contracted by 3.7 percent year on year in the third quarter ‎of 2013 and grew a marginal 0.2 percent in the fourth quarter. Policy makers note that ‎the economy seems to have stopped weakening more recently as export markets ‎improve and private consumption remains resilient.‎

The weaker yen has already affected the diamond, jewelry and luxury sectors. The likes ‎of Moët Hennessy Louis Vuitton (LVMH), Cartier, Tiffany & Co. and Harry Winston have ‎reportedly raised prices at their local stores to offset the depreciating yen. ‎

Tiffany & Co. reported that its sales in Japan fell 6 percent year on year to $192 million in ‎the fourth quarter that ended January 31, 2013, reflecting the weak yen, but rose 4 ‎percent to $639 million in 2012 due to an increase in the average price per jewelry units ‎sold. The company expects the forecasted low-single-digit sales growth in yen will equate ‎to a low-teens decline when translated and reported in dollars for the current year.‎

Tiffany & Co.’s management explained in a March 22 earnings conference call that it ‎projects an average yen exchange rate of 93 to the dollar in 2013 compared to an ‎average of 81 in 2012, leading to a 15 percent negative effect from translation. ‎

Given the continued yen depreciation since then, Tiffany & Co. should be reviewing ‎those numbers and consequently its outlook, as should other luxury jewelers which count a significant portion of their total sales in Japan. ‎
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A similar effect is in play for polished diamond importers. Japan’s polished imports fell 10 ‎percent ‎year on year to $127.8 million during January and February but rose 4 percent ‎by yen value, according ‎to the latest available data published by Momozawa on behalf of ‎the Finance Ministry.‎ ‎

For local importers, dollar-based diamonds have become expensive to buy from ‎overseas suppliers but they are likely profiting from older inventories they can now sell at ‎higher yen rates. Indeed, while 1-carat diamond prices are basically flat so far in 2013, ‎they have appreciated by 15 percent in yen terms (see Graph below). ‎

But there is a deeper opportunity for the trade as Japan’s baby boomers, who were ‎caught up in diamond fever in the eighties and nineties, have started to trade in their jewelry ‎more recently. While the import of polished diamonds may have declined during the past ‎two decades of recession, there remain a significant quantity of diamond jewelry in the ‎country, which may now be ready to be tapped. Not quite the size of the U.S. jewelry ‎recycling market, Japan’s pawnshop, second-hand jewelry trade is burgeoning and ‎efficient. ‎

Recycled jewelry markets tend to rise when gold prices hit highs, tempting households to ‎take advantage and cash in. “In that sense, the headlines screaming record gold prices ‎are our most effective marketing tool,” one trader told Rapaport News. Whereas the U.S. ‎recycled jewelry market may have slowed recently since gold has slipped from its dollar ‎highs, Japan’s yen-based gold prices are currently in that cycle, having increased 7.8 ‎percent since the beginning of the year. ‎

As is often the case, diamonds will tag along with gold for the ride. This provides an ‎attractive buying opportunity for an international diamond trade constantly looking for ‎new sources of supply. Indeed, most of the recycled Japanese diamonds are exported to ‎India for re-cutting and distribution. ‎

It is unlikely that Japan will become a net exporter of polished diamonds any time soon. ‎After all, the country has a limited diamond manufacturing sector and is still an important ‎luxury market. Japan accounts for about 10 percent of global consumption of diamond ‎jewelry even if its stake is declining as China and India gain market share. ‎

But the dynamics are changing and the deliberate yen depreciation represents another ‎factor to hedge when operating there. Then again, if the government’s efforts are ‎effective, Japan may well reposition itself as a growth market. And with an eventual ‎stable currency, strengthen its position in the diamond and jewelry trade.   ‎

The writer can be contacted at

Follow Avi on Twitter: @AviKrawitz

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Tags: Avi Krawitz, diamonds, Harry Winston, Japan, jewellery, Jewelry, LVMH, Rapaport, Shinzo Abe ‎, Tiffany & CO., Yen
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