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For Japan’s manufacturers, yen gains are reminder of Lehman lessons

Bloomberg

Just when Japan’s employers might have thought it was safe to embrace sustained wage increases — thanks to a cheap yen and rising earnings — a turn in the exchange rate has flashed a warning signal.

The yen’s advance in the past month, especially amid market turmoil and an economic slowdown in China, shakes the notion that depreciation achieved under the Abe administration is permanent. The shift threatens to undermine annual wage negotiations in the spring that already began on a weak footing, with labor unions casting an eye at subdued economic growth.

“My concerns are becoming reality,” said Kohetsu Watanabe, president of one of the hundreds of thousands of small companies that account for much of Japan’s workforce. “I’ve got to treat the outlook of my business with a lot more caution than before.”

Watanabe runs Daikyo Seiki Co., a small machine-parts maker in Akita Prefecture that sells to auto-industry clients that could be hurt by a resurgent yen and weaker demand in China.

While he heeded the calls of Prime Minister Shinzo Abe and Bank of Japan Gov. Haruhiko Kuroda to boost pay over the past couple of years, this year he’s planning to limit wage increases to less than a third of the 7 percent bumps he gave in 2014 and 2015.

“Things can turn very quickly. That’s what I learned from the Lehman shock,” Watanabe said. “Japanese policy makers must realize the importance of a stable currency.”

Finance Minister Taro Aso signaled Tuesday he is not concerned about a stronger yen and market losses, saying economic fundamentals for Japanese companies are “not bad at all.”

Still, economists see reluctance on wages among Japanese companies big and small.

“If you’re thinking about increasing wages and investment, it’s going to be discouraging to learn that your profits are headed lower because of a strong yen,” said Masaaki Kanno, the chief Japan economist at JPMorgan Chase & Co. “The strong yen makes Japanese companies nervous, especially manufacturers.”

Watanabe said that for now he will carry on with plans to upgrade machinery. At the other end of the scale, Nissan Motor Co. is forging ahead with an initiative to boost domestic production to more than 1 million vehicles in 2016.

“Let’s not forget that we said the natural point for the yen is ¥100,” Chief Executive Officer Carlos Ghosn said this week. “¥117 or ¥125 is not going to change anything for us.”

At Toyota Motor Corp., which saw profit jump 13 percent in the third quarter, the labor union will seek a modest ¥3,000 increase in monthly base salary at this spring’s wage talks, half of the amount requested last year, public broadcaster NHK reported.

That follows a decision by the Japanese Trade Union Confederation to aim for increases of “about” 2 percent for 2016 after falling short last year in a push for hikes of “at least” that amount.

In an attempt to coax unions into pushing for larger wage gains, Kuroda attended the confederation’s New Year’s party on Jan. 5 and reminded leaders that “2 percent inflation isn’t sustainable if there is no wage increase to match it.”

Japanese manufacturers assumed ¥118 per dollar for a business plan in the six months through March, according to the Bank of Japan’s tankan survey conducted last month before gains accelerated.

And for some Japanese companies — such as importers — a stronger yen has financial benefits.

While the currency has not strengthened to a level that would prompt the BOJ to act immediately, the bank must be watching the currency carefully because a high yen was a key reason for Japan to slip into more than a decade of deflation, said Izumi Devalier, an economist at HSBC Holdings PLC.

The yen holding steady at ¥115 would unnerve the BOJ and a level of ¥110 would compel the central bank to consider further stimulus, she said.