Japan Update: Will the Swiss Franc be the Lifeboat amid the JPY Storm?

As the maritime industry continues to evolve amid growing uncertainties, Japanese shipowners face the challenge of making strategic decisions regarding new energy propulsion choices and navigating the rising costs of newbuilds. Compounding these issues is the historically weak Japanese Yen (JPY), which has made purchasing US Dollar (USD) denominated assets exceedingly expensive. Consequently, shipowners and financiers have had to adopt more creative loan strategies. Whilst it isn’t something new, borrowing in Swiss Francs (CHF) has emerged as a promising alternative with higher demand from shipowners of late. Let’s dive into why this option might be beneficial in the medium term.

As we covered in last week’s commentary, the JPY has experienced significant depreciation, reaching historical lows against the USD (161.12 at the time of publishing!). For Japanese shipowners, this has meant higher costs when purchasing USD-denominated newbuild vessels. Even with newbuilding order books extending into 2028/2029, the weak yen implies that more JPY is required to meet USD obligations during milestone payments, increasing the financial burden on shipowners.

In contrast to the volatile Yen, the Swiss Franc is renowned for its stability. The CHF is a safe-haven currency, maintaining relative strength against both the USD and JPY. Swiss interest rates are traditionally low, making borrowing in CHF an attractive option despite the currency’s current strength. Swiss banks offer some of the lowest interest rates globally, which can result in significantly reduced financing costs for Japanese shipowners compared to borrowing in JPY. Although Japanese interest rates are also very low, the weak Yen diminishes this advantage due to high conversion costs when purchasing USD-denominated ships.

The stability of the CHF provides a more predictable environment for debt servicing. Unlike the JPY, which has fluctuated significantly due to economic policies and external market pressures, the CHF has remained relatively steady (despite their own recent banking struggles). This stability offers Japanese shipowners greater certainty in their financial planning, mitigating the risks associated with currency exchange rate volatility.

A primary concern for Japanese shipowners considering CHF loans is the currency mismatch risk, given that their chartering income is primarily in USD. Adverse movements in the USD/CHF exchange rate could increase the cost of repaying CHF-denominated loans. However, maintaining a portion of operational funds in CHF can provide a buffer against adverse currency movements, and shipowners can develop strategies to align their CHF loan repayments more carefully with their revenue cycles, thereby minimising exposure to exchange rate volatility.

While currency mismatch risk is a valid concern, the potential benefits of CHF borrowing outweigh these risks, especially for shipowners with robust strategic financial management. Leveraging the strengths of the Swiss financial system, Japanese shipowners can navigate these challenges effectively through their domestic financiers.

In the current economic climate, where the Japanese Yen is historically weak and the Swiss Franc remains strong and stable, Japanese shipowners face a strategic decision. Borrowing in CHF from Swiss banks presents a compelling alternative to JPY financing for USD-denominated newbuild contracts. The advantages of lower interest rates, currency stability, and reduced overall financing costs make CHF a financially sensible option.

Despite discussions of potential interventions, Japan’s prolonged deflationary pressures, monetary easing policies, and broader global economic trends suggest that the yen will likely remain weak in the coming years. Borrowing in CHF could be part of a broader financial strategy for owners and should take into consideration the impact of currency fluctuations on overall profitability, maintaining adequate cash reserves, and employing financial instruments to hedge and mitigate currency risk. This will then enable owners to optimise their investments in newbuilding vessels and secure a more stable and cost-effective future for their long-term projects. As the global economic landscape continues to shift, adopting flexible and forward-thinking financial strategies will be key to maintaining competitiveness and ensuring sustainable growth in the maritime industry.

So, while it might seem like navigating a ship through stormy seas, CHF borrowing could be the sturdy vessel for owners to thrive in these uncertain times. Anchors aweigh!

By Eugene Quek, Partner & Head of Projects in Japan.