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.