Strong yen is a problem for Japanese economy

The stage is set for Japan's economy to roar back, but despite all the efforts of the government and corporate sector, the strong yen threatens to undo all the hard work.

Japan's problem is that despite its recent troubles, much of the rest of the world is in an even more fractious state, facing economic slowdowns and debt crises. In an uncertain world, Japan and the yen are increasingly being seen as safe havens.

While this may be reassuring for some investors, there are dire implications for a country that has relied on exports for its growth. The strong yen makes Japan's products less competitive compared with rivals such as China and South Korea.

Worse, profits made abroad are worth less when they are brought back home.

Thorough with the Japanese problems

The weak dollar dumps cold water on some of Japan's largest corporations and exporters, since a higher yen value makes exports from the likes of Sony and Sharp to Toyota and Honda less competitive.

Meanwhile, Japanese consumers are faced with a mixed bag. The slight appreciation of the currency helps in capping the rising cost of food and fuel, which have both become concerns due to price inflation.

But because dollar-based profits from overseas will drop, corporations could cut back on capital investment and employment, which will have a spillover effect on households. "The negatives outweigh the positives," says Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland.

The kind of appreciation the yen is experiencing now isn't necessarily a bad thing, says Takashi Omori, chief economist for Japan at UBS. He points to the fact that about 80% of Japanese imports are contracted on foreign currency and this would allow for savings on import costs with an appreciating yen and make up for some losses expected in export sales.

But, in relative terms, the yen is not as weak as it was in 2004, when the government last intervened. Central bankers in Japan believe a rate of 100 yen to the dollar is not excessive appreciation but rather a form of normalization and adjustment. However, though the continuing weakness of the dollar stems from America's subprime crisis and is beyond Tokyo's effective control, its consequences on Japan's economy will be significant.

Currency losses

Toyota has said that for every yen the currency rises against the dollar it loses 34bn yen ($442m; £271m) in operating profit. The problem is so worrying that the government and central bank intervened in the currency markets on 4 August in an attempt to weaken the currency.

It worked, but only for a short time, and the yen has again approached its highest level since the end of World War II, 76.25 to the dollar. Over the weekend, Finance Minister Yoshihiko Noda was on Japanese television talking tough, hinting the government may step in again.

"An unstable situation is continuing," he told public broadcaster NHK. "As foreign exchange matters are my prerogative I will continue to closely watch the markets and take bold action if it becomes necessary."

The price of failure to bring the currency down could be high.Over time, Japan's economy could be hollowed out.

A survey of 105 leading Japanese firms showed more than half were considering moving some factories and offices overseas. Almost as many said the yen staying below 80 to the dollar would depress sales and profits. Only four said they would be able to withstand the yen dropping below 75 to the dollar and maintain their workforces in Japan.

Power shortages

While the yen may be the headline concern at present, salarymen sweltering in their offices in Japan's stifling August heat are all too aware of the other threat to Japan's economy: power shortages.

The ongoing crisis at the Fukushima nuclear plant means big companies have been ordered to reduce their electricity consumption by 15%, and the first step for many has been to cut down on air conditioning. Others have reinvented the weekend, shifting the working week to spread demand across all seven days. But the discomfort and disruption could be as nothing if Japan continues down the path it is on now. The country looks likely to embark on an extraordinary experiment to see whether it can survive without nuclear power, which before March supplied 30% of its electricity needs.

Confidence in the safety of the technology has been shattered by the disaster at Fukushima, and scares over radiation in beef and other foods have added to the alarm.Since the disaster, local authorities have been refusing to give permission for reactors in their areas to be switched back on after routine maintenance, which usually takes place every 13 months.

Already two thirds are offline. If public antagonism continues then by early next year none of them will be operating. Even more severe electricity shortages would be another reason for Japanese firms to cast their eyes overseas.

CONCLUSION

The price of failure to bring the currency down could be high.Over time, Japan's economy could be clutch out. With the yen as strong as it is, many argue that they just cannot afford to take on any more problems at the moment.

"An unstable situation is continuing," by a public broadcaster. "As foreign exchange matters are my prerogative I will continue to closely watch the markets and take bold action if it becomes necessary."

Moreover, as the value of YEN getting stronger, the more would be affect on Exports…and there would be negative impact on Japanese Economy.

Submitted to:

Mr. Gurdeepak Singh

Submitted by:

Vishu Gupta

MBA 1 (B)