Analysis-In Japan, the weakening of the yen may no longer be the blessing of Reuters

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© Reuters. File photo: In this photo illustration in Tokyo on February 28, 2013, you can see a US hundred dollar bill and a Japanese 10,000 yen banknote. REUTERS/Shohei Miyano/File Photo

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Author: Tetsu Kajimoto

TOKYO (Reuters)-The weakness of the yen, once seen as beneficial to Japan’s export-oriented economy, has now become a pain point because it erodes household finances and confuses policy makers.

The gradual shift of Japanese manufacturers to offshore production means that a weak yen will benefit local exporters less than it was about a decade ago.

This shift means that some officials in Japan’s Ministry of Finance, who are responsible for monetary policy and known for responding to the sharp rise in the yen, are now paying more attention to the unfavorable factors of currency weakness, that is, the impact of rising import costs.

As expectations of interest rate hikes in the United States support the US dollar and Japan’s bleak economic outlook, the US dollar-yen exchange rate hit 115.525 yen this week, which is the lowest level since January 2017. These concerns have become the focus of this week.

“The weak yen has pushed up import prices, putting pressure on the profits of companies that rely on imports of raw materials and household purchasing power,” said Citi economist Kiichi Murashima. “Given that import penetration is rising, the negative impact of the weak yen may be greater than before.”

Reversing the strong yen trend through large-scale monetary easing is one of the main goals of the “Abenomics” stimulus policy during the eight-year term of the former Prime Minister Shinzo Abe to 2020. Prime Minister Fumio Kishida is expected to follow this strategy.

During this period, the exchange rate of the Japanese Yen against the U.S. dollar fell by 50%. However, the export volume has remained basically unchanged, which indicates that the currency is weak and while still beneficial to overseas Japanese companies, it does not necessarily make the country’s goods more attractive to foreign buyers.

A survey by the Ministry of Economy, Trade and Industry of Japan shows that in 2020, a quarter of Japanese manufacturers use offshore production, compared with 18% in 2010.

The 2011 earthquake and tsunami accelerated this trend, and as exports slowed and fuel imports surged, the trade balance turned into a deficit.

As of 2020, exports now account for approximately 15% of Japan’s economy, and its contribution to OECD countries is second only to the United States, and is lower than 17.5% in 2007.

In contrast, the consumer sector’s share of GDP has stabilized at 53%, which makes the economy more vulnerable to soaring prices of imported goods caused by the weak yen.

Until 2011, Japan will vigorously intervene to prevent the yen’s strength from weakening its export competitiveness, but it also occasionally takes measures to prevent currency devaluation.

The last time Japan intervened to prevent the yen from falling was during the Asian financial crisis in 1998, when the dollar broke through 146 yen.

Analysts believe that such a move is extremely unlikely this time, but some analysts believe that 125 yen is a potential risk line.

A Reuters survey of companies earlier this month showed that if the yen continues to weaken, about one-third of respondents expect profits to fall.

Reduce your yen burden

For policymakers, it is important that the devaluation of the currency weakens the purchasing power of Japanese households and reduces the price they pay.

The depreciation of the yen has pushed up the prices of imported brand-name products, from luxury cars to expensive watches to smartphones, as well as foods such as imported beef from the United States.

For example, in the past ten years, the price of the new iPhone has tripled to 190,000 yen, which is equivalent to 60% of the average monthly salary in Japan. However, during this period, wages remained basically unchanged.

Although the governor of the Bank of Japan Haruhiko Kuroda believes that the benefits of a fall in the yen outweigh the disadvantages, this view has not been unanimously agreed.

“The current weakness of the yen is quite unfavorable and will weaken Japan’s purchasing power in the long run,” said a government source familiar with the matter, emphasizing the need to resolve public debt and increase productivity in order to improve Japan’s competitiveness.

Some central bank governors have also acknowledged this challenge.

“For large companies that do business overseas, the weak yen has significantly boosted their profits,” Junko Nakagawa, a member of the Bank of Japan’s board of directors, told Bloomberg in an interview published on Friday. “On the other hand, the weak yen will push up import costs, which will put pressure on domestic businesses.”

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