Seen in its proper context, the yen’s recent decline is a move back to its pre-crisis levels rather than the start of a currency war or a beggar-thy-neighbour policy.
The strength of the move since September last year has drawn plenty of criticism in the region, particularly from Korea, but the truth is that most Asian countries are net importers from Japan and are benefiting from the weaker yen, having suffered as a result of its sharp appreciation at the outbreak of the global financial crisis.
“Our word of choice is ‘retracement’," says Standard & Poor’s in a report released yesterday. “While the depreciation of the yen since the third quarter of 2012 has been stunning, it has basically retraced the sharp appreciation in late 2008 and 2009. As a result, the yen is broadly unchanged in real effective terms since mid-2008.”
Indeed, if any country has beggared its neighbours, it is Korea. When the yen’s real effective exchange rate spiked 30% at the end of 2008, as a result of safe-haven flows seeking shelter from the rest of the world, the won moved 20% in the opposite direction and remains weaker than it was before the crisis — and weaker than the yen.
In terms of competitiveness, Korea is the most vociferous and the least affected of Japan’s neighbours.
Japan is also becoming less important as a trading partner within Asia, thanks to much faster economic growth in the rest of the region, and particularly in China.
“Notably, Japan's share of Chinese exports has more than halved and stood at 7.7% in 2012,” says S&P. “Imports from Japan show a similar pattern, having fallen by 5.5 percentage points on average to 10.3% in 2012. No economy in Asia has seen a rising share of its imports coming from Japan.”
And that includes Korea. Indeed, Korea is actually a net importer from Japan, running a small but consistent trade deficit of 2% to 3% of gross domestic product during the past decade.
Several other countries also stand to benefit from cheaper Japanese inputs. Hong Kong and Thailand are the region’s biggest importers from Japan, as a share of their economies, while Singapore, China and India also run small trade deficits.
There are also some losers, of course. Based on last year’s trade balances, Malaysia, Vietnam and Indonesia run surpluses. But even for these countries, stronger economic growth in Japan would be broadly positive.
Another complaint about Japan’s monetary policy is the effect it has on portfolio flows, and whether this might affect other markets in the region. But S&P finds little evidence to support such fears, noting that most of the foreign flows are to and from other advanced economies.
“Any portfolio impact from a weakening yen on the rest of the region will be limited,” it says, with the caveat that significant further weakening could well lead to bigger flows into emerging economies, as well as putting more competitive pressure on its neighbours’ currencies.
For now, Japan is right to worry about getting its own house in order.