Explainer-Why the weak yen lost its lustre for Japan Inc By Reuters

By Satoshi Sugiyama and Maki Shiraki

TOKYO (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 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 (OTC:) Ltd, 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 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 (NYSE:) Corp…