Exporters hope for yen boost

When Naoto Kan was asked about his views on the exchange rate on Thursday, he was careful to remind himself and his audience that “answering such questions carelessly can lead to terrible things”.

Japan’s newly appointed finance minister did say he wanted to see the yen weaken to about Y95 and the markets responded by sending the yen tumbling against both the dollar and the euro. His comments “roiled the forex markets”, said Kyohei Morita, Japan chief economist at Barclays Capital in Tokyo.

Nevertheless, Mr Kan’s willingness to stick his neck out for a weaker yen – a rare move by a finance minister – is likely to be appreciated by Japan’s beleaguered exporters.

Ever since the financial crisis hit the world and demand for everything from televisions to sport utility vehicles dried up, Japan’s global titans, from Toyota to Panasonic, have had to contend with falling sales and a strong yen that has made them less competitive in key markets.

A rise of one yen against the US dollar leads to a Y35bn (£237m, $379m, €264m) drop in operating profits for Toyota. The story is a familiar one for Japanese manufacturers.

In the mid-to-late 1990s, when the yen appreciated to Y80 to the dollar, they faced a similar situation. At the time, the finance ministry intervened aggressively in foreign exchange markets in a battle to weaken the yen, earning the then vice-minister for finance the nickname Mr Yen. Still, the yen remained stubbornly strong against the dollar, forcing carmakers, in particular, to rethink their strategies and globalise their operations.

In contrast, the yen remained relatively weak against the dollar in the mid-2000s, boosting exports substantially. “Japan intervened aggressively to keep the yen weak,” says Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.

Thanks also to a buoyant global economy, Japanese exports grew strongly, helping to pull the country out of a prolonged depression.

Mr Morita at Barclays points out that the yen’s level against the dollar has a direct impact on exports and economic growth, with a fall of Y5 against the dollar leading to an estimated 0.71 per cent rise in exports in the first year and a 1.48 per cent rise in year two.

If the yen weakens by Y5 against the dollar, it has the effect of pushing gross domestic product up by 0.16 per cent in the first year and 0.26 in the second year, Mr Morita estimates.

It is not surprising then that Mr Kan, who is clearly concerned about supporting economic growth, should want to resort to weakening the yen to give the economy an added boost. “It’s an easy way to stimulate the economy in the short term,” says Mr Shirakawa.

A weaker yen would also put upward pressure on prices, helping to tackle the problem of Japan’s persistent deflation. Mr Morita estimates that a Y5 drop against the dollar would lead to a rise in the consumer price index of 0.12 per cent in the second year and 0.16 per cent in the third year. However, few analysts see Mr Kan’s verbal intervention as a viable long-term strategy. This is not only because “the more you do it, the less effective it becomes”, says Masaaki Kanno, Japan chief economist at JPMorgan in Tokyo. A dependence on exports to lift the Japanese economy contradicts the ruling Democratic Party of Japan’s policy of shifting to domestic demand as the driver of economic growth.

Depending on exports can also backfire, says Mr Shirakawa. The Japanese economy grew for four years from 2003 to 2007, supported by exports. But when the global economy collapsed in 2008, Japan’s economy was hammered more than others, Mr Shirakawa says.