Analysis-In Japan, a weaker yen may not be the blessing it once was

By Tetsushi Kajimoto

TOKYO (Reuters) – A weak yen, once seen as favourable for Japan’s exports-focused economy, has now become a pain point as it eats into household finances and confounds policymakers.

A gradual shift by Japan’s manufacturers to offshore production means a weak yen has become less of a boon for local exporters than it was about a decade ago.

That shift means some at Japan’s finance ministry, which is in charge of currency policy and known to step in to counter sharp yen rises, are now paying more attention to the downsides of a weaker currency, namely the effects of higher import costs.

Putting those concerns into focus this week, the dollar hit 115.525 yen, a level not seen since January 2017, as expectations for higher U.S. interest rates propped up the greenback and Japan’s economic outlook darkened.

“A weak yen pushes up import prices, weighing on profits at companies dependent on raw materials imports and household purchasing power,” Citi economist Kiichi Murashima noted. “The negative impacts of a weak yen may be larger than before given the penetration ratio of imports is on the rise.”

Reversing the strong yen trend through massive monetary easing was one of the key goals of former Prime Minister Shinzo Abe’s “Abenomics” stimulus policies over his eight years in office to 2020. Prime Minister Fumio Kishida is expected to follow this strategy.

Over that period, the yen lost 50% against the dollar. However, export volumes remained mostly unchanged, suggesting a weaker currency, while still beneficial for Japanese companies abroad, has not necessarily made the country’s goods more attractive to foreign buyers.

A quarter of Japanese manufacturers used offshore production in 2020, compared with 18% in 2010, according to a survey by the Ministry of Economy, Trade and Industry.

The 2011 earthquake and tsunami accelerated that trend, swinging the trade balance into deficit as exports slowed and imports of fuel surged.

Exports now make up roughly 15% of Japan’s economy as of 2020, the second smallest contribution among OECD nations after the United States and down from 17.5% in 2007.

In contrast, the consumer sector’s share of GDP has held steady at 53%, making the economy more vulnerable to the surge in imported goods prices caused by a weaker yen.

Up until 2011, Japan would intervene heavily to stop a strong yen from crimping the competitiveness of exports, but it has also on rare occasions stepped it stop the currency falling.

The last time Japan intervened to stop yen declines was 1998 during the Asian Financial Crisis when the dollar broke above 146 yen.

Analysts think such a move is highly unlikely this time, but some analysts see 125 yen as a potential line in the sand.

A Reuters’ survey of companies earlier this month showed about…