FINANCE-JAPAN: Stronger Yen Does Little for Asia’s Economy

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Oct 14 1998 (IPS) - The much-battered Japanese currency has been experiencing a surge of strength against the dollar in recent days, but no one is breaking out the champagne.

Since last week, the yen has been on a dizzy ascent — between 13 to 15 percent — against the US greenback. But economists and other experts here say this will not improve gloomy economic conditions in Japan and the rest of Asia.

“I don’t see a turnaround in Japan just because the yen has risen,” says Kyoji Okada, senior strategist for Daiwa Research Institute, which is affiliated with one of Japan’s leading financial institutions, Daiwa Bank.

“The current volatile trading in exchange rates reflects more a loss of confidence with the U.S. economy rather than a stronger Japanese economy,” he adds.

Asian economies reeling from a region-wide financial crisis since July last year have been incessantly calling on Japan to help them recover by increasing imports and overseas investments. But the yen’s recent rise is not going to make that a reality soon.

“I don’t see much hope for Japan and Asian economies despite the high yen, because basically the fundamentals of these economies remain bad,” says economist Keiji Omura of the Tokyo-based think tank Institute of Developing Economies. “Weak economies need weak currencies.”

On Wednesday afternoon, the yen was being traded at 119.71 to the U.S. dollar. On Tuesday, the yen at 118.30, reflecting a small decline from last week’s rate of 111.45 yen to the dollar.

But the figure is still a dramatic increase from exchange rates posted at the beginning of October, when the yen hovered between 130 to 135 to the dollar — numbers that have become quite constant in the past few months.

Analysts say the high yen will be a factor till the end of the year, fluctuating between 120 and 105 yen to the dollar.

A strong yen and the corresponding gloomy outlook for Japan are based on the assumption that Japanese goods have become less price- competitive abroad. The nation’s leading financial newspaper, the ‘Nikkei Weekly’, says the situation could further impede economic recovery, helping fuel a deflationary spiral in Japan.

Okada explains that the yen’s climb will affect Japanese manufacturing companies that have helped buoy the staggering Japanese economy with strong exports. “The high yen coupled with the possibility of negative growth in the U.S. economy means trouble for Japanese exporting companies,” he says.

The yen’s strength has already dragged down the Nikkei Stock Average as share prices of export-oriented blue chip companies such as Sony Corp and Honda Motor Corp. Share prices on Oct. 8 for Honda was down 28 percent, and Sony down seven percent.

Sony, which based its financial projections for this fiscal year on an average exchange rate of 135 yen to the dollar, has issued a statement saying the company’s profits will be hurt within a few months if the current strong-yen pattern lasts.

The company estimates that each one-yen gain against the dollar will reduce its profit by five billion yen. To be sure, the big surge in the yen will cause huge damage to exports to Europe, the only positive factor for corporate earnings.

A recent survey by the Daiwa Institute also indicates that if the yen falls to just 120 against the U.S. greenback, major Japanese companies will likely see an overall 10 percent year-on-year fall in pre-tax profits.

Moreover, says Yasunari Ueno, chief market economist at Fuji Securities, declining prices for imports will add to the ‘defure’, as deflation is called in Japan.

With no positive prospects for growth in Japanese companies, economists also point out that Asian countries will be unable to increase exports to Japan.

Restructuring and closing down sluggish sectors in major companies have increased unemployment — 4.1 percent this year from two percent in 1997 — forcing already tense consumers to tighten their purse strings some more.

Several department stores have reported huge losses in sales, which are down 30 percent these past two years.

Comments Omura: “Despite a high yen, domestic demand remains weak in Japan, which deals a blow to increasing exports from Asia.”

But some experts are seeing a glimmer of hope amid the gloom. Ken Landon, strategist at Deutsche Bank, says the good part of the current high-yen scenario is that Japanese banks will now be able to clear out their bad loans made in foreign currencies.

Japan’s bad loans-estimated at one trillion dollars by U.S. experts is pulling back growth due to a fall in credit. Landon says the Bank of Japan will now print more Japanese yen and buy back the currency, thus encouraging the demand for the yen.

This in turn will help ailing Japanese banks to get rid of bad debts, he says.

“I agree with the analysis that Japan’s export sector will be hurt as a result of the high yen,” says Landon. “But the focus is on tackling the banking crisis so the Japanese government will support the current exchange rate trend.”

On Monday this week, feuding legislators agreed on major legislation that would provide up to 431 billion dollars to bail out the country’s troubled banks.