Weaker Currency May Hasten Japan Recovery

The yen’s recent decline against the dollar has rattled policymakers in Washington and Tokyo, raised the threat of government intervention in currency markets and perhaps even contributed to Wall Street’s recent downward spiral.

Despite all the global hand-wringing, however, the fastest path to a Japanese recovery--and the boost that such a turnaround would provide for the U.S. and global economies--may in fact be to let the currency fall further, according to some analysts.

“People have ignored the fact that a weaker yen helps Japan,” said Garry Evans, strategist with HSBC Securities. “It would be a monetary stimulus and also lead to greater corporate profits.”

While the yen gained some ground Wednesday to trade at 143.86 to the dollar in New York, from a 146.05 low earlier this week, Japan’s currency is expected to remain anemic for the foreseeable future, given the nation’s deep-seated economic, banking and regulatory problems. Some see it as low as 160 by year-end.

“The yen could continue to depreciate, if you look at the fundamentals,” said Nobuhiro Okuyama, an analyst at Mitsubishi Research Institute. “Japan’s financial troubles and distrust with the government and politics have not improved.”

Yet a weaker yen would help Japan by improving the nation’s export prospects. Kenichiro Mizoguchi, assistant manager at Hitachi Ltd., explains that a depreciated currency allows his company either to sell its semiconductors, computers and industrial widgets abroad at higher profit margins, or to keep the same margins but become more competitive.

Of course, ever more competitive Japanese autos, construction equipment and machine tool makers would raise howls of protest from U.S. and European trading partners. And in the short term, it would make life even tougher for Japan’s staggering Asian neighbors.

But if the ultimate goal is to turn around Japan, analysts say, like it or not exports are one of the few sectors of Japan’s economy that actually work in a reasonably efficient way. Some 24% of Japanese corporate earnings are now tied to overseas sales.

Getting an economic boost from exports looks particularly promising when compared with the alternatives, analysts add. Any hope that consumer spending can spelunk Japan out of its cave any time soon appears dim. Household spending fell 5.4% in June--the eighth straight monthly decline--and consumer confidence is at a record low.

Further clouding the picture is the fact that the Japanese save almost three times as much as their American counterparts. That means this week’s $50 billion in announced personal and corporate tax cuts are far more likely to end up in troubled banks than in local cash registers where they might provide a boost. By some estimates, it would take a $100-billion cut to start seeing real results, at which point government finances would be in even worse shape.

A second traditional method for jump-starting the economy is government spending. But Japanese governments have tried a series of stimulus packages since 1992. The result has been trillions of yen thrown at boondoggle construction projects, with almost no lasting economic impact. Few experts believe the latest $120-billion effort will be much different.

The likelihood that an export-led recovery would be resented in Washington, Brussels and other trade capitals is seen by some here as a necessary evil.

“Those [overseas] critics are right,” said Tetsuro Sugiura, chief economist with Fuji Research Institute. “But this is not the time to change [the structure]. Right now we can’t lift up domestic demand with stimulus packages.”

Another concern with a recovery based on a weaker yen is that it improves Japan’s position at the expense of its troubled Asian neighbors. This is because Japanese companies, in effect, use their currency advantage to become even more competitive against South Korean videocassette recorder and auto manufacturers, thereby threatening to derail their neighbors’ turnarounds.

Asian neighbors would likely suffer some competitive disadvantage, analysts concede. That said, an export-led recovery in Japan would tend to pull Asian economies along with it eventually, given Japan’s extensive business and financial links with the region, said Craig Chudler, strategist with Salomon Smith Barney Japan.

“You must get Japan fixed first,” he said.

Some Asian neighbors with substantial loans denominated in yen could also see some benefit.

A final argument for letting the yen weaken is that it might help Japan’s monetary situation, Chudler said. In effect, a weaker yen supported by sufficient demand could increase inflationary pressure. While it’s counterintuitive to imagine any nation would want inflation, Japan is actually worried about deflation these days. Japanese consumer prices fell 0.8% in June, the largest drop in eight years, amid fears that more factories could be shuttered and people put out of work.

The weak yen position is being quietly argued inside the government, says analyst Evans: “The [Bank of Japan] has been in favor of a weak yen for some time now. The only thing left, they argue, is a weak yen.”

But Japanese officials apparently haven’t been listening; instead, they have worked overtime to jawbone the currency higher. Finance Minister Kiichi Miyazawa suggested Tuesday that a falling yen would not be tolerated, a reversal from last week’s suggestion that the markets should decide.

“I don’t think such an excessive fall of the yen is desirable, not only for the Japanese economy but also for the Asian and the whole world economies,” echoed chief Cabinet Secretary Hiromu Nonaka.

Behind the desire for a higher yen may be the need to maintain appearances in the eyes of voters and foreign trading partners, who tend to see the currency as a barometer of a nation’s worth. “It’s not clear the weak yen hurts Japan,” said Richard Jerram, economist with ING Barings. “It’s really national pride.”

Any joint intervention by Washington and Tokyo at this juncture would be a major mistake, however, several analysts said. Intervening too frequently with too little impact risks undermining central bank credibility. The two countries jointly intervened June 16 to buy yen and sell dollars, which temporarily pushed the dollar back down to the 136-yen level from 146.78.

Any near-term intervention also may be questionable until it’s clear that the new government of Prime Minister Keizo Obuchi can deliver on its promise to restore growth and force through some much-needed structural change. The markets will look for clues Friday, when Obuchi is scheduled to unveil his economic program.

“Intervention is always a dangerous game before you have the right policies in place,” said Russell Jones, chief economist with Lehman Bros. Japan Inc.

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A Yen for Less

Some argue that the anemic yen might be the best answer to Japan’s woes, given the alternatives. The yen’s rise and fall against the U.S. dollar since 1991, showing how many yen a dollar the U.S. dollar since 1991, showing how many yen a dollar would buy (scale is inverted):

Wednesday: 143.86

Source: Bloomberg News