Japan is going back to the 1990s, not in a good way. The yen has gone from safe haven trade to speculators’ favourite, plunging past 150 to the dollar to a 32-year low on Friday. That means more than just higher input costs for local companies.
The Japanese currency has weakened more than 45 per cent against the US dollar from early last year. The decline initially reflected the wide interest rate gap between Japan and the US, which Bank of Japan policies encourage. But the yen’s recent volatility cannot be blamed just on the rate differential. Speculators have piled into the world’s third most traded currency after the dollar and euro.
This means bad news for the broader economy. Japan relies heavily on imports for key supplies, including most of its food. Almost all of its energy is imported. A weaker yen inflames inflation and has led to a record trade deficit of ¥11tn ($73bn) for the six months to September.
Any boost Japan’s exporters enjoyed when the currency’s slide began last year has diminished, offset by surging raw materials prices. This is especially true for electronics groups, such as Panasonic and Daikin, whose shares have fallen about a fifth this year. Panasonic’s operating profit had begun eroding from rising material costs late last year.
A longer-term risk for companies is pay. Real wage growth has hardly budged over the past three decades and the weaker yen shrinks pay in dollar terms. Japan already struggles to attract foreign workers. This is important. By 2040, Japan will need four times more overseas labourers than it has today to cope with its ageing and declining population.
Despite the finance minister warning of “decisive action” against excessive yen moves, that has fallen on deaf ears in the market. Even a record $19bn yen-buying, dollar-selling operation last month did little to reverse the plunge. By the time the central bank changes direction, the damage may already be done.
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