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Exports resist jump-start of weakened yen through ‘Abenomics’

by Atsushi Kodera and Reiji Yoshida

Staff Writers

According to orthodoxy, taking some starch out of the yen — an unofficial, yet unmistakable, goal of Prime Minister Shinzo Abe’s signature monetary policy — is manna to exporters, who will help pull the country out of its protracted economic malaise.

But recent figures throw into question this traditional success strategy, upheld by many aides and advisers to Abe. The cheaper yen has so far failed to reverse the growing trade deficit, belying the myth that the economy can be sustained by exports.

February’s trade deficit, released Wednesday, was ¥800.3 billion, the largest negative amount for the month since 1979, when comparable data became available.

The 20th month in a row in arrears stands in sharp contrast to Japan’s routinely huge trade surpluses through the 2000s.

While February’s deficit was far less alarming than the staggering ¥2.8 trillion in January, the overall amount of exports continues to trend downward, said Yasunari Ueno, chief market economist at Mizuho Securities Co.

Much of the blame can be laid on soaring imports of fossil fuels to compensate for the suspension of all the nation’s commercial nuclear power plants in the wake of the meltdowns at the Fukushima No. 1 plant in 2011.

Nevertheless, the cheaper yen has not put a charge into exports, in terms of the overall amount, Ueno said.

“The reason why the quantity of exports remains sluggish despite the yen’s depreciation has been explained in terms of the economic slump in emerging economies such as ASEAN countries, structural changes in Japan’s economy, and a change in pricing strategies of Japanese exporters,” Ueno said by email.

The greatest of these factors, Ueno believes, is structural change: namely, the massive migration overseas of production capacity by major Japanese exporters, led by automakers and electronics firms.

Consequently, exports have been slow to recover despite the yen’s recent depreciation, Ueno said.

Although many Japan-based companies are now exporting more components, at the same time more finished products are being imported, contributing to the overall suppression of exports.

“The shrinkage of Japan’s manufacturing sector is dramatic. There were as many as 14 million workers in the sector in the early 1990s, but now this has shrunk by about one-third to below 10 million,” said Yukio Noguchi, a prominent economist and adviser to Waseda University’s Institute of Financial Studies.

“The loss of manufacturing and the migration overseas is irreversible,” he said. “We should look for a new industry (to lead the economy).”

At its policy meeting on March 10 and 11, the Bank of Japan held to its view that “Japan’s economy has continued its recovery moderately,” and opted to stand by its two-year plan to double the monetary base, according to a statement released afterward.

Nestled as well in the statement was the assessment that “exports have leveled off more or less,” in contrast with the previous statement that said “exports have generally been picking up.”

At the subsequent press conference, BOJ Gov. Haruhiko Kuroda attributed the sluggish exports to temporary factors such as cold weather in the United States, the lunar New Year holiday season observed in East Asian countries and products diverted to meet surging domestic demand before the consumption tax hike.

But economist Nobuo Ikeda is not persuaded by this rationale. Although he believes those factors may have played a role in hobbling exports, he had expected both exports and imports to improve.

“No one really expected export growth would remain so sluggish despite the yen’s depreciation,” Ikeda said.

“Normal economic theory holds that when the yen depreciates, it helps exports recover. . . . This time the yen has dropped about 20 percent, but exports have not grown as expected.”

Last April the BOJ set a target of doubling the monetary base within two years, stating that its goal was to shake off entrenched deflation, not weaken the yen.

But, Ikeda said, the BOJ’s and Abe’s hidden purpose was to knock down the yen to boost exports.

Meanwhile, the overall economy has shown signs of slowing. The government on March 10 revised downward the seasonally adjusted, real gross domestic product for the October-December period in 2013 to ¥528 trillion, up 0.7 percent from the preceding three months on an annualized basis. This represents a significant drop from about 4 percent growth in the previous two quarters.

“The figure for the July-September period was also revised down to below 1 percent, meaning that a low growth below 1 percent continued for two consecutive quarters,” Ueno said.

  • Steve Jackman

    The Yen was considerably weaker than it is now for a good part of Japan’s two lost decades. There were periods during 1998-2008 when the Yen was quite weak (USD-JPY of 125-147), yet the Japanese economy continued to stagnate and lose competitiveness.

    If the weak yen did not help lift Japan’s competitiveness back when USD-JPY was at 125-147, how is it going to help this time around when the Yen is relatively stronger at around 100-105, especially since Japan is now facing much stiffer global competition?

    It boggles the mind how people have such short memories.

  • Alejandro S. Arashi

    To the extent that the weak yen has stoked inflation/ended deflation I was in favour of it.

    What I was never in favour of was targeting exchange rates to make Japan “competitive”. This mercantilistic thinking ignores the fact that there is an economic constituency that loses from lower JPY/USD rates, and that constituency might be bigger than the constituency that gains from a lower yen.

    At the very least the relative sizes of the 2 constituencies should have been compared. I’m not convinced that analysis was even done.