Explainer: Why the weak yen lost its lustre for Japan Inc
12/04/2022 08:43
By Satoshi Sugiyama and Maki Shiraki
TOKYO, April 12 (Reuters) - The weak yen was once a cause
for celebration for Japanese companies, as they could sell cars
and cameras cheaper abroad and enjoyed fatter profits when
earnings were brought home.
These days, it's not so straightforward.
After years of bolstering overseas production and supply
chains, Japan's manufacturers now see less benefit from a softer
currency, company officials and economists say.
In fact, the economic pain from a weaker yen JPY=EBS has
become stark now, as the recent yen sell-off has sharply lifted
commodities costs in a blow to household spending. It also shows
how the steady move to overseas production is slowly changing
the dynamics of the world's no.3 economy.
WHAT'S CHANGED FOR JAPANESE COMPANIES?
Almost a quarter of Japanese manufacturers' production is
carried out overseas, according to the latest trade ministry
data. That compares to around 17% a decade ago and less than 15%
two decades ago.
Around two-thirds of the cars that Japanese makers sell
annually are now made abroad, according to Reuters calculations
based on data from the Japan Automobile Manufacturers
Association.
Two decades ago, cars made overseas accounted for less than
40% of sales.
Companies are also moving away from the
manufacture-and-export model of old as technology has changed
their businesses. Hitachi Ltd 6501.T , for example, is
increasingly focused on providing digital solutions to customers
globally rather than just hardware.
WHAT'S THE DOWNSIDE RISK?
The weakness in the yen has driven up the cost of fuel and
other commodities for manufacturers at home. Critically, it is
also hitting household spending and consumer confidence in the
domestic market - adding to the pain for a creaking economy.
A December survey of nearly 7,000 companies by data and
research firm Tokyo Shoko Research found that almost 30% of
companies said a weak yen was a negative for their business,
while 5% said it was a positive. The remaining 65% said it was
neither a negative or a positive.
Those that said the weak yen was negative on average cited a
rate of 107 yen to the dollar as preferable - a level
considerably stronger than the 125.75 JPY= hit on Tuesday.
The weak yen drives up the cost of acquiring businesses
overseas, although that could be less of a concern for many
cash-rich Japanese firms. At the same time, the weak yen makes
Japanese companies cheaper targets for foreign buyers.
WHAT'S THE OUTLOOK FOR COMPANIES?
Many manufacturers, including automakers, say that one of
the benefits of producing more in local markets is less
sensitivity to currency swings.
Even though there may be concerns about producing in certain
markets - such as China - it seems unlikely that the trend
toward offshore production will reverse in any meaningful way
soon.
Toyota Motor Corp 7203.T has been working to reduce the
impact of the yen on its earnings, a spokesperson said, without
giving details. Within the company, the weak yen was not
necessarily viewed as a benefit, the spokesperson said, adding
the higher cost of raw materials was one demerit.
For retailers, the weak yen has been painful, as it drives
up costs, including for energy and food. Budget clothing
retailer Shimamura Co Ltd 8227.T said recently it would have
to increase the price of some of its items by an unprecedented
3-4%.
WHAT DO POLICYMAKERS SAY?
The Bank of Japan's governor, Haruhiko Kuroda, has
repeatedly said that while the weak currency can squeeze
households and retailers, the benefits to the economy https://www.reuters.com/business/finance/boj-keep-rates-low-strong-not-weak-yen-still-kurodas-enemy-no-1-2022-04-01
outweigh the negatives.
But he looks increasingly alone in his emphasis on the
positive, as government officials have increased their warnings
against excessive yen declines.
Some of Kuroda's former finance ministry colleagues now see
the weak yen as a sign of Japan's fading economic power.
Earlier this month he said the yen's recent moves were
"somewhat rapid", his strongest warning yet on the currency's
move, although he followed that by emphasising the benefits of a
weaker yen.
HOW LOW CAN IT GO?
That's anyone's guess. The yen's rapid decline - last month
it fell more than 5% versus the dollar, its biggest monthly drop
since November 2016 - has taken some in the markets by surprise.
Japan's former top currency diplomat Eisuke Sakakibara told
Reuters last month that the government should intervene in the
currency or raise interest rates to defend it if it weakens
beyond 130 to the dollar.
Weakening beyond 130 "could cause problems" said Sakakibara,
known as "Mr. Yen" for masterminding several currency
interventions to soften the yen in the 1990s.
(Reporting by Satoshi Sugiyama and Maki Shiraki; Additional
reporting by Tetsushi Kajimoto, Shinji Kitamura and Ritsuko
Shimizu; Editing by David Dolan & Shri Navaratnam)
((david.dolan@tr.com; +81 3 6441 1526; Reuters Messaging:
david.dolan.thomsonreuters.com@reuters.net))