When the yen was stubbornly stuck near record highs in late 2012, policymakers and corporate leaders agreed that the strong currency was crippling Japan’s manufacturers and dragging down the broader economy.
So at the behest of the Japanese government and in response to ¥80 trillion ($670 billion) of annual monetary easing from the Bank of Japan over the last two years, the yen has since fallen by more than a third in value against the dollar to its weakest level since the summer of 2007.
When measured on a real effective exchange rate basis that takes into account inflation and deflation, the yen is now reckoned to be the weakest since exchange rates began floating in 1973.
But for many parts of the deflation-dogged Japanese economy, the benefits of the weaker yen have been less than expected, while the negatives are now looming larger.
The theory was simple. A weaker yen would boost exports and encourage big manufacturers to invest in long-neglected plants and equipment in Japan.
Achieving that goal, though, has proven elusive. While some big names such as Panasonic and Canon have made headlines by announcing that they will “re-shore” production back to Japan, broader data suggests that the results are spotty at best.
Data for industrial production covering March show a month-on-month decline of 0.3%, adding to a 3.1% fall the previous month. There was a small consolation that the drop was much less than the 2.3% predicted by economists.
Some economists say that the sluggishness in any export growth reflects a fundamental and long-term shift in strategy by major manufacturers, who want to put plants near their customers without constantly worrying about where costs may be cheapest. Also the cache of “Made in Japan” has changed.
“The world has moved from the concept of ‘made in’ to a concept of ‘made by’, as exemplified by Apple,” Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said.
Even the Bank of Japan conceded last fall that it had underestimated these structural shifts in the manufacturing base. It predicted that a yen-led boost in exports would help fuel inflation just as other factors started to taper off. That didn’t happen, however, and the central bank appears as far away as ever to reaching its goal of “stable prices,” which it defines as a consumer price inflation rate around the 2% level.
At its late-April meeting, the BOJ trimmed its inflation forecast for the fiscal year that ends next March, predicting core CPI inflation of 0.8%, down from the previous 1.0% projection.
Many private-sector forecasts now believe that Japanese prices could turn negative again by the summer.
“We forecast that core national CPI will turn negative year-on-year around the April-June quarter with the drop in energy prices cancelling out cost-push pressures from yen depreciation,” Goldman Sachs said in a research report in March.
Recent trade data bolsters the view that long-term changes have taken place in trading patterns. March data showed that exports rose 8.5% from the same time last year, following a 2.5% gain in February. But that is in yen value terms, meaning that actual export volumes were not nearly as strong.
“What has been difficult is that exporters have not been rushing to expand,” Schulz said. “Production has not been going up as much as policymakers had hoped.”
At the same time, the weak yen’s negative impact is worrying.
Japan is highly dependent on imports of food and energy, therefore worse terms of trade serve to drain money out of the domestic economy and crimp personal spending.
The government, seeking to revive Japan’s fortunes under the “Abenomics” program named after Prime Minister Shinzo Abe, hopes higher wages will come to the rescue.
It wants inflation to turn from cost-push to demand-led so that a virtuous cycle can take root.
As a result, the Abe government is making much of the fact that wages among big companies in Japan are rising at their highest level in 17 years. But the actual figure is a modest 2.4%, extra cash that does not even cover the April 2014 increase in the sales tax by 3 percentage points.
What’s more, the highly publicised number only represents what the biggest – and more profitable – companies are doing. The crunch will likely come among small and medium-sized firms, which sell locally and face higher fixed costs.
“Therefore, it is unclear if mid-to-small companies will follow the [favourable] wage increases provided by large companies,” Sumitomo Mitsui Asset Management said in a recent report.
Consumers are also starting to see higher prices. That is good news for the BOJ but not necessarily for the average person.
Ubiquitous fashion retailer Uniqlo announced in April that it was raising prices for a second time due to the higher cost of goods and labour in China and other manufacturing bases, exacerbated by the weak yen. It said that it would push up its Japan prices by 10% on average after an October hike of 5%.
It’s not all bad news of course. Inbound tourism, historically negligible in GDP terms, has taken off, with a noticeable impact on Tokyo and other big travel destinations.
The weak yen has also been widely cited for the quantum leap in share prices on the Tokyo Stock Exchange, one of the big success areas for Abenomics. The Nikkei 225 index rose more than 40% in the two years ending in April.
That wealth effect, plus hopes that the export picture may represent paradise postponed rather than paradise lost, means the ever-upbeat BOJ Governor Haruhiko Kuroda may eventually win and drag Japan out of its deflation mindset.
By that time the central bank will likely own most of the country anyway.