TOKYO – A steady fall in the value of the yen is proving a godsend for exporters such as Toyota. The cheaper yen is making their products more affordable overseas.
Japan’s trading partners are generally pleased, too, even though the lower yen makes their exports relatively more expensive. As many see it, other nations — from China to Britain to the United States — stand to benefit from a more vibrant Japanese economy, the world’s third-largest.
Then there are entrepreneurs like Thamonwan Thawornthaweewong. They have a more sour view. Thamonwan sells imported goods in Japan, like Angry Bird fish balls, squid rings and other products. The lower yen makes such goods cost more in Japan.
“It’s affecting us because Japanese customers need to pay more,” she says.
Even Japanese policymakers who favour a cheaper yen to help energize Japan’s long-stagnant economy wonder if the currency’s fall could go too far.
The yen slipped past 100 to the U.S. dollar this month. It’s hovering near 102 yen per dollar — more than 20 per cent weaker relative to the dollar and the euro than it was six months ago.
Gyrations in exchange rates can erode business confidence and investment. The yen’s decline has also raised the risk of a currency war in which nations manipulate their currencies’ values as economic weapons.
News of weaker-than-expected growth in Thailand in the first quarter of the year, for example, intensified pressure on its central bank to curb the rise of its currency, the baht. If other countries countered by devaluing their own currencies, any benefit Japan has enjoyed could be reversed. Though the Bank of Thailand hasn’t intervened, Tokyo can’t expect its trading partners to hold out indefinitely for an eventual payoff from a Japanese economic rebound.
Japanese officials say their goal isn’t to devalue the yen. Rather, they say the currency’s slide is a byproduct of the economic stimulus policies embraced this year by Prime Minister Shinzo Abe’s administration. Under Abe’s direction, Japan has embarked on an aggressive campaign to lift consumer prices, encourage borrowing and spending and improve Japan’s economic competitiveness — a program dubbed “Abenomics.”
As part of that effort, Japan’s central bank is flooding its financial system with money — action that has helped shrink the value of the yen.
The Abenomics blend of fiscal and monetary stimulus and pledges of reforms helped boost Japan’s economic growth to an annual pace of 3.5 per cent in the January-March quarter.
As the yen’s value has sunk, travel budgets of tourists from Thailand and elsewhere have been stretching further. Yet for Thamonwan, whose company earns about a tenth of its sales in Japan, it’s a headache. Some Japanese aren’t willing to pay for higher-priced imports.
“We are now seeing a slight decline in orders from Japan,” she says.
Particularly in Asia, Japan’s frequent trading partners could lose a competitive edge because their goods now cost more relative to Japan’s. China’s, the world’s second-largest economy after the United States, is among them.
Yet China is “not particularly worried,” about the weaker yen, says Kenneth S. Courtis, an investment banker and former Goldman Sachs vice chairman. Courtis pointed out that a lower-valued yen reduces the cost of factory equipment and oil imported from Japan.
A separate challenge for Japan is that economies throughout the world are struggling, and many consumers aren’t inclined to spend more — even for lower-priced Japanese goods. In Europe, for example, the euro alliance is in the midst of its longest-ever recession. Many economists warn of a lost decade ahead for the eurozone similar to the one Japan endured.
And the U.S. economy, the world’s largest, is thought to be growing at a subpar annual rate of about 2 per cent in the current April-June quarter. Growth has been slowed by a still-weak job market and across-the-board government spending cuts that began taking effect March 1.
What’s more, Courtis notes that “the last time there was such an aggressive currency devaluation like the yen’s, it blew up Asia,” referring to the Asian financial bust of the late 1990s. That crisis erupted after diminished confidence in Thailand’s economy forced the country to devalue its currency.
To some extent, Australia’s “billabong bonds” as its government debt is dubbed, have replaced Japan’s government bonds as a haven for global investors now that the Bank of Japan is soaking up 70 per cent of Tokyo’s bond sales.
Australia’s central bank this month cut its key interest rate by a quarter percentage point to a record low 2.75 per cent. The goal is to boost growth and counter damage from a strengthening Australian dollar.
South Korea’s central bank also cut its benchmark interest rate by a quarter percentage point to 2.5 per cent. India and Europe have also reduced key interest rates.
And New Zealand’s central bank intervened in the currency market this month for the first time in five years, seeking to curb a 12 per cent rise in the Kiwi dollar since the middle of last year. The Philippine central bank is also thought to be intervening in the foreign exchange market by buying dollars to curb the peso’s rise.
Apart from the risks of escalating devaluations, such tactics may be the wrong medicine for economies such as Indonesia and the Philippines that already are awash with cash, says Rob Subbaraman, chief Asia economist for Nomura.
Some worry that Japan’s aggressive drive to reduce interest rates, paired with similar programs in the West and China’s efforts to spur lending, could inflate dangerous bubbles in assets like stocks or real estate. On Wednesday, U.S. Federal Reserve Chairman Ben Bernanke signalled his belief that it’s too soon for the Fed to curtail its stimulus programs, which are intended to encourage borrowing and spending.
The 10-nation Association of Southeast Asian Nations recently voiced such concern in a joint statement with the Asian Development Bank that noted potentially “excessive risk taking and leverage, credit expansion and asset bubbles.”
Apart from overheating property markets, economists see signs of trouble in corporate and consumer debt. Such debt has jumped 67 per cent in the past five years in Asia outside Japan to $1.66 trillion, according to Euromonitor International.
“I worry about the debt buildup,” Subbaraman says. “Frothy property markets from China to Hong Kong to Mumbai to Manila.”
Until recently, Asian financial markets had seemed sturdier than those in wealthier Western countries. “They are not as strong as they were before the global crisis,” Subbaraman says.
Double-digit gains in share prices in many regional stock markets, where price-to-earnings ratios used to judge value are veering higher, are another worrisome sign, says Rajiv Biswas, an economist with IHS in Singapore.
In Japan, Abenomics is so far having a mixed effect. Automakers and electronics makers are enjoying higher profits. But energy-intensive steel mills and utilities are struggling with surging costs for fuel and other key commodities when valued in yen.
Utility rates and prices of basic necessities, such as noodles, flour and oil are also rising. Pay has risen only modestly and only for some workers. And long-term interest rates that the Bank of Japan is manoeuvring to try to keep low have risen. Mortgage lenders have tweaked their own rates higher.
As the yen has fallen, investors in Japan and elsewhere have begun shifting assets into shares and into overseas investments in search of higher yields. Japan’s net overseas portfolio investments, including equity securities, bonds and money market instruments rose to nearly 2.5 trillion yen ($24.4 billion) in March from minus 1.87 trillion yen (minus $18.2 billion) in September.
The search for higher returns by Japan’s megabanks and insurers, and other investors, is keeping brokerage AB Capital Securities in Manila, the Philippines, busy.
“We’ve managed to be in the spotlight of most fund managers who are looking for high yields,” says Jose Vistan, its head of research. “A lot of money that would have gone to the major markets has been coming here to the Philippines, and a testament to that would be the record high levels of the equities market.”
Associated Press writers Thanyarat Doksone in Bangkok and Teresa Cerojano in Manila contributed to this report.