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By Tetsushi Kajimoto

TOKYO (Reuters) – A weak yen, once seen as good for Japan’s export-oriented economy, has now become a problem as it eats away at household finances and puzzles policymakers.

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

The change means that some members of Japan’s finance ministry, which is in charge of monetary policy and known to intervene to counter strong yen rises, are now paying more attention to the downsides of a weaker currency, namely the effects of rising import costs.

Highlighting these concerns this week, the dollar hit 115.525 yen, a level not seen since January 2017, as expectations of a U.S. interest rate hike supported the greenback and Japan’s economic outlook turned down. darkened.

“A weak yen pushes up import prices, weighing on the profits of companies dependent on raw material imports and household purchasing power,” noted Citi economist Kiichi Murashima. “The negative impacts of a weak yen could be greater than before as the import penetration rate is on the rise. “

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

During this period, the yen lost 50% against the dollar. However, export volumes remained largely unchanged, suggesting that a weaker currency, while still being beneficial for Japanese companies overseas, did not necessarily make the country’s products more attractive to consumers. foreign buyers.

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

The 2011 earthquake and tsunami accelerated this trend, pushing the trade balance into deficit as exports slowed and fuel imports increased.

Exports now represent around 15% of the Japanese economy as of 2020, the second smallest contribution among OECD countries after the United States and down from 17.5% in 2007.

In contrast, the share of the consumption sector in GDP remained stable at 53%, making the economy more vulnerable to the surge in the prices of imported goods caused by a weaker yen.

Until 2011, Japan would intervene heavily to prevent a strong yen from hurting the competitiveness of exports, but it has also, on rare occasions, stepped up its action to prevent the fall of the currency.

The last time Japan intervened to stop the yen from falling was in 1998, during the Asian financial crisis, when the dollar surpassed 146 yen.

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

A Reuters survey of companies earlier this month showed that about a third of those polled expected profits to decline if the weakness of the yen persists.


Importantly for policymakers, a deteriorating currency has undermined the purchasing power of Japanese households, giving them less for what they pay.

The waning value of the yen has pushed up the prices of imports of brands ranging from luxury cars and expensive watches to smartphones as well as food items such as imported American beef.

For example, the price of a new model of iPhone has tripled to 190,000 yen over the past decade, which is equivalent to 60% of the average monthly salary in Japan. During this period, however, salaries have remained broadly unchanged.

While Bank of Japan Governor Haruhiko Kuroda maintains that the advantages of the yen’s declines always outweigh the disadvantages, such an opinion is not shared equally.

“The current weakness of the yen is rather negative, undermining Japanese purchasing power in the long run,” said a government source with knowledge of the matter, stressing the need to repair public debt and increase productivity to make Japan more efficient. competitive.

Some central bankers have also recognized the challenge.

“For large companies operating overseas, a weak yen greatly increases their profits,” BOJ board member Junko Nakagawa told Bloomberg in an interview on Friday. “On the other hand, a weak yen puts a strain on companies with domestic operations by increasing import costs. ”

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