Facing the prospect of the first growth-free fiscal year since the 2009 global recession, Japan’s policy makers are keeping faith that a weaker exchange rate will help the world’s third-largest economy.
While the yen’s 26 percent slide against the dollar in the past two years has yet to stoke the nation’s exports and production, Japan’s central bank and economy chiefs in the past week both signaled a green light to a further decline. Koichi Hamada, an adviser to Prime Minister Shinzo Abe, said in an interview that a weak yen “is a positive for Japan’s economy.”
The remarks underscore the chance of deeper depreciation as the U.S. Federal Reserve withdraws stimulus and Japan maintains it. The dynamic means the Bank of Japan will get additional help in maintaining inflation, at the cost of a deeper erosion in purchasing power for consumers hit by a higher sales tax.
“They’re definitely welcoming further weakness in the yen,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo and a former BOJ official. “Conditions aren’t as solid as they were. That’s why officials might be more strident in comments on exchange rates.”
The yen, which traded at 106.14 per dollar at 9:07 a.m. in Tokyo, has fallen 3.4 percent in the past three weeks as the European Central Bank moved to add stimulus and Fed officials indicated they’re closer to tightening policy. The Japanese currency’s weakening to a six-year low offers fresh impetus to price pressures in Japan, which had waned in recent months.
For BOJ Governor Haruhiko Kuroda, the inflation implications are a boon as he and his colleagues await the wage-driven increases in consumer prices that would signal a strengthening economy. Economy Minister Akira Amari said last week that a falling exchange rate helps consumption as it boosts asset prices and corporate profits.
“There is no doubt that the weakening yen is positive for Japan’s economy on the whole,” Amari’s deputy, Yasutoshi Nishimura, said in an interview yesterday.
The central bank governor in August said there was no reason for the yen to appreciate. Last week, as he outlined reasons for the dollar to rise, he said: “I don’t think that would be particularly bad for Japan’s economy.”
Kuroda’s remarks on the yen mark a shift in nuance that signal a preference for the currency to weaken, said Tomo Kinoshita, chief economist at Nomura Holdings Inc.
“A weak yen provides cover for the BOJ,” said Kinoshita. “A decline in the currency will push up consumer prices, which will make a path to an end of deflation more promising.”
Consumer prices excluding fresh food -- the BOJ’s main gauge -- rose 3.3 percent in July from a year earlier, with electricity prices climbing 8.5 percent. Stripping out the higher sales tax, core inflation was 1.3 percent, short of the 2 percent target Kuroda said he aimed to reach in about two years when he began unprecedented easing in April last year.
Declines in the yen also entail costs for Japan. The nation has posted record trade deficits as the currency dropped and energy imports surged after the 2011 nuclear disaster.
The more competitive exchange rate hasn’t translated into significantly larger shipments overseas, with export volumes rising just 1 percent in July from levels in late September 2012.
Finance Minister Taro Aso signaled the government wants any moves in the currency to be gradual, telling reporters yesterday that abrupt changes in exchange rates aren’t ideal.
The Nikkei 225 Stock Average has gained more than 50 percent since Abe took power in December 2012 amid expected benefits for corporate Japan.
Honda Motor Co., Japan’s third-largest car maker, in July raised its profit forecast to the highest in seven years for the year through March, on the weaker yen and higher sales in emerging markets.
A ratio of pretax profit to sales was 5.2 percent in the quarter through June, the highest in comparable data to 1954, according to the finance ministry.
Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co. in Tokyo, said that given the size of contraction in gross domestic product in the wake of an increase in sales tax to 8 percent, the economy will be stagnant for the year through March.
The risk of the worst fiscal-year performance since 2009 means the BOJ probably will add stimulus, and Abe will be more aggressive with deregulatory changes, Feldman wrote in a Sept. 8 note.
A weaker yen is a essential for the BOJ to achieve its inflation goal next year and a decline of about 10 percent could lift the inflation rate by about 0.5 percentage point, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former central bank official.
“The net impact from a drop in the yen is still positive for Japan’s economy, though the advantage gained is less than it was in the past,” said Kanno.