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.