Author: Tetsushi Kajimoto
TOKYO (Reuters) – A weak yen that was beneficial to Japan’s export-based economy has now become painful as it eats up domestic finances and confuses political leaders.
The gradual shift of Japanese manufacturers to offshore production means that the weak yen has benefited less than a decade ago for local exporters.
This change means that the Japanese Ministry of Finance, which is responsible for monetary policy and is known to intervene in tackling the sharp rise of the yen, is now paying more attention to the downsides of a weaker currency, namely the consequences of high import costs.
Paying attention to these concerns this week, the dollar jumped to 115,525 yen, a level not seen since January 2017, as expectations of higher U.S. interest rates pushed the green card and Japan’s economic outlook was clouded.
“A weak yen is driving up import prices, driven by profits from companies dependent on raw material imports and domestic purchasing power,” said Citi economist Kiichi Murashima. “The negative effects of a weak yen may be greater than before, as the import penetration ratio is rising.”
Changing the yen’s strong trend through massive currency easing was one of the main goals of former Prime Minister Shinzo Abe’s “Abenomics” stimulus policies until 2020. Prime Minister Fumio Kishida is expected to pursue this strategy.
During that period, the yen lost 50% against the dollar. However, export volumes have mostly remained unchanged, suggesting a weaker currency, although beneficial to Japanese companies abroad, it does not necessarily make the country’s goods more attractive to foreign buyers.
A quarter of Japanese manufacturers used offshore production in 2020, up from 18% in 2010, according to a survey by the Ministry of Economy, Trade and Industry.
The 2011 earthquake and tsunami accelerated this trend, turning the trade balance into a deficit as exports slowed and fuel imports rose.
Exports now account for approximately 15% of the Japanese economy as of 2020, the second lowest contribution among OECD nations after the United States and below 17.5% in 2007.
In contrast, the share of GDP in the consumer sector remained at 53%, and the economy became weaker in the face of rising import goods prices caused by a weaker yen.
Until 2011, Japan would intervene heavily to ensure that a strong yen did not reduce the competitiveness of exports, but it has rarely taken a step to stop the currency from falling.
The last time Japan intervened to halt the fall of the yen was in 1998 during the Asian Financial Crisis, when the dollar broke above 146 yen.
Analysts believe that such a move is very difficult this time around, but some analysts see 125 yen in the remainder.
Earlier this month, a survey of companies by Reuters showed that a third of respondents expected a decline in profits if the weakness of the yen continues.
LESS BANG FOR YOUR YEN
It is important for politicians that a corrupt currency has thwarted the purchasing power of Japanese homes, giving them less for what they pay.
The declining value of the yen has pushed up prices for brand-name imports, from luxury cars to expensive watches, to mobile phones, as well as food products such as U.S. beef imports.
For example, the price of a new iPhone model has tripled in the last decade to 190,000 yen, the equivalent of 60% of Japan’s average monthly salary. During this period, however, wages have remained roughly.
Although the governor of the Bank of Japan, Haruhiko Kuroda, outweighs the merits of the fall of the yen, this view is not shared equally.
“The current weakness of the yen is quite negative, weakening Japan’s purchasing power in the long run,” said a government source with knowledge of the issue, stressing the need to fix public debt and increase productivity to make Japan more competitive.
Central banks have also accepted the challenge.
“For large companies with overseas operations, a weak yen provides a big boost to profits,” BOJ board member Junko Nakagawa told Bloomberg in an interview published on Friday. “On the other hand, a weak yen is tempting companies with domestic operations to raise import costs.”