Cheaper yen demands caution

One of the most visible outcomes of Prime Minister Shinzo Abe’s economic policy is the sharp fall of the yen, which declined against the dollar by roughly 20 percent over the past year. The weaker yen, aided by the Bank of Japan’s massive monetary easing, boosted the earnings of the nation’s export-oriented manufacturers and pushed up share prices. But caution is spreading against an excessive fall of the yen, and some business leaders warn that a decline of the currency past ¥110 against the dollar will hurt the Japanese economy more than it helps. Policymakers must carefully watch the negative effects of the weak yen.

In the export-driven economic model of the past, a weak yen would make Japanese products more competitive and boost the export of cars and electronics products. Since many of the export-led manufacturers today have shifted production abroad in response to years of a strong yen, a weakening of the currency alone does not increase Japanese exports. Exports today are more influenced by ups-and-downs in demand in overseas markets.

On the negative side, a weak yen drives up the cost of imports. Concerns are growing that the yen’s further decline will push up prices of imported materials beyond an acceptable level and harm the bottom lines of manufacturers that rely on such imports. Higher prices of daily necessities ranging from bread to gasoline due to the weak yen are also taking a toll on households.

In addition, Japan has increased imports of fossil fuels to run thermal power plants following the shutdown of nuclear power plants in the wake of the 2011 Fukushima nuclear disaster. But due to the weakening yen, the cost the nation pays for liquefied natural gas imports has grown much faster than the volume of imports, contributing to the widening trade deficits. Ending years of deflation is a key agenda item for the Abe administration, but a major part of the rise in consumer prices over the past year comes from rising import prices due to the weak yen.

The weak yen has brought about positive developments. Some manufacturers have begun to shift their overseas production back to Japan as domestic production makes business sense under the yen’s current exchange rate, creating jobs at their Japanese plants. Large firms have production bases both in and out of Japan and can adjust operations in domestic and overseas plants to maximize profits in accordance with the changes in exchange rates.

Unfortunately, however, small and medium-size companies that have relocated their production abroad cannot easily move their operations back home despite the yen’s fall. Adding to their woes are sharp rises in labor costs in China and other Asian economies that have achieved rapid growth in recent years.

Currency exchange rates can fluctuate wildly and the economy has long been dogged by an excessive appreciation of the yen against other major currencies. The yen’s decline under Abe’s watch has raised the popularity of his economic policy, but the weak yen has disadvantages. The government and the BOJ should carefully assess the negative impacts of the falling yen in their policy management and take corrective measures as necessary.