Japanese Retailers Lock in FX Contracts as Weak Yen Hits Profits

Japanese retailers are overhauling supply contracts and turning to financial derivatives as the yen hovers near 159 per dollar, driving up import costs across food and consumer goods.

The currency has shed more than 30 per cent against the greenback over the past five years, eroding buying power for domestic store operators that rely heavily on overseas agricultural products, raw materials and finished goods.

Supermarkets Shift Supply Terms

Takara MC, which runs 43 supermarkets south of Tokyo, has abandoned monthly price negotiations with overseas suppliers in favour of quarterly and annual agreements. Chief executive Taku Ueno said securing terms for up to a year on imports such as US beef, Spanish olive oil and Italian tomatoes allows the chain to shield shoppers from immediate price increases on store shelves.

Securing supply deals has grown harder as rival buyers from China and Thailand consistently outbid Japanese grocers for commodity shipments.

Bankers report that small and mid-sized store operators, which previously absorbed modest currency swings, are now turning to futures, forwards and options contracts to limit their balance sheet exposure.

Corporate Hedging Stretches Further

Nitori Holdings, the country’s largest furniture retail chain, estimates that every 1 yen drop against the US dollar reduces its operating profit by roughly 2 billion yen ($12.5 million). While the company has avoided direct hedges to date, it is reviewing forward contracts if currency weakness continues.

Brokers in Tokyo say hedging volume is expanding well beyond traditional tenors. Daiwa Securities noted that client requests to lock in exchange rates have stretched from the usual few months out to as long as five to 10 years, while Bank of America expanded its Tokyo foreign exchange sales team over the past two years to handle the surge in corporate demand.

For retailers across East Asia, Japan’s currency predicament shows how sustained foreign exchange weakness can upend long-standing retail pricing models. Competitors elsewhere in the region, operating with firmer currencies, continue to snap up global agricultural allocations that once went routinely to Tokyo buyers.

Market participants at JP Morgan project the dollar-yen rate will persist in the 155 to 165 corridor, keeping the pressure firmly on Japan’s store operators as contract renewals approach in the coming quarter.