Yen's fall a bane and boon for Japan, curse for Asia
Yen's fall a bane and boon for Japan, curse for Asia
By Linda Sieg
TOKYO (Reuters): Japanese policy-makers confronting an ever weaker yen could be forgiven a bit of ambivalence, given conflicting views on how much a falling currency helps or hinders the beleaguered economy.
But when it comes to the rest of Asia, most pundits agree: an ever-weaker yen makes regional woes worse and at some level risks sparking competitive currency devaluations.
The battered yen slid to 140.73 to the dollar in Tokyo morning trade on Monday, its lowest level in seven years.
Traders said the currency was dragged down by persistent worries about the Japanese economy and the health of its banking sector.
The yen's fall triggered declines in other Asian currencies, including the Malaysian ringgit, the Thai baht and the South Korean won, and pushed the Taiwan dollar to an 11-year low.
Japanese Vice Finance Minister Koji Tanami responded by pledging Tokyo would "act decisively" against excessive yen weakness, but Prime Minister Ryutaro Hashimoto said all Japan could do was "closely monitor" currency moves.
"There's a bit of doubt about what the game is at the moment," said Richard Jerram, chief economist at ING Barings.
"Do they really want the yen to stop going down? Do they really think it's overshooting? Do they really think the weak yen is going to hurt Asia and do they really care?" Jerram said. "It's not entirely clear."
Some economists argue the yen's slide helps Japan, bringing the promise of higher exports to the United States and Europe.
"The biggest problem Japan has right now from the cyclical perspective is a massive inventory overhang and the only way they can solve that is through an export drive to the economies of Europe and the United States," said Jesper Koll, chief economist at J.P. Morgan in Tokyo.
Others, however, counter that many of the benefits to Japan are offset by domestic negatives, while the fresh blow to Asian currencies and economies will end up hurting Japan as well.
Gone, for example, are the days when the boost from a weaker yen to exporters' profits automatically spelled a shot in the arm for the broader economy, said Robert Feldman, chief economist for Japan at Morgan Stanley.
"The weak yen benefits some individual companies but it's not likely that...will spur any extra investment in exporting industries, so one of the channels of yen transmission to a stronger Japanese economy is cut off," he said, adding that firms importing goods, meanwhile, would see their costs rise.
"Even the incremental addition to export volume from a weaker yen may not be so high, because a lot of that's already been done," Feldman said. "Although some will benefit, those who lose will probably lose more."
Japan's weak demand means companies are unable to pass on higher import prices and so are seeing margins squeezed, said Susumu Kato, chief economist at Barclays Capital Japan.
And while Japanese exporters have gained a competitive edge from the yen's fall against the dollar, they have lost out against other Asian currencies, economists said.
"If the yen's fall meant higher exports and hence recovery, it would be a plus, but the yen is still strong against other Asian currencies, so it's not a plus at all," Kato said.
In addition, the weakened state of other Asian economies means shrinking demand for Japanese goods in a region which until recently accounted for 40 percent of Japanese exports.
Further falls in Asian currencies and a worsening of the economic troubles in the rest of the region would boomerang back on Japan's own shores, economists said.
"If Asian economies worsen, Japanese exports will decrease. And if you consider the chain reaction between a weakening yen and Asian currencies, a further weakening is not good for Japan," said Hisashi Yamada, an economist at the Japan Research Institute.
Regional concerns do weigh heavily on the minds of Japanese authorities just now, Kosuke Nakahira, a former vice finance minister for international affairs, told Reuters.
"It (a rapidly weakening yen) is not good for the Asian recovery, certainly. Japanese authorities are worried about it," said Nakahira, now an adviser to the Institute for International Economic Studies, a think-tank owned by Toyota Motor Corp.
At precisely what yen level the risk of competitive currency devaluations -- by China in particular -- becomes real, however, remains a big question. "That's the level the market is trying to test," said Barclay's Kato.