By Tetsushi Kajimoto

TOKYO (Reuters – A weak yen was once viewed favorably for Japan’s export-oriented economies. However, it is now a headache as it eats into households finances and confuses policymakers.

Japan’s manufacturing companies have been shifting to offshore production, which has led to a decline in the value of the yen for local exporters.

This shift has meant that some in Japan’s finance ministry (which is responsible for currency policy) are paying closer attention to negative effects of weaker currencies, such as higher import prices.

These worries were put into perspective this week when the dollar reached 115.525 Japanese yen. It was at that level since January 2017 as higher U.S. Interest rates supported the greenback. Japan’s economic outlook deteriorated.

Kiichi Murashima, Citi economist noted that a weak yen can push up import prices which in turn weighs on the profits of companies dependent upon raw material imports as well as household purchasing power. The rising penetration of imports may have greater negative consequences than the weakening yen.

The former Prime Minister Shinzo Abe, who was in his eighth year of office from 2008 to 2020, set out to reverse the trend of strong yens through massive monetary ease. This strategy is likely to be followed by Prime Minister Fumio Kishida.

The dollar lost 50 percent over this time period. However, the export volume remained mostly constant, suggesting that a weaker currency has not made Japan’s products more appealing to foreign buyers.

According to the Ministry of Economy, Trade and Industry, 25% of Japanese companies used offshore production in 2020, as compared to 18% in 2010.

Tsunami and earthquake in 2011 accelerated this trend. The trade deficit was inflated as fuel imports increased and exports fell.

Japan’s current export contributions are approximately 15% as of 2020. They were the second lowest contribution among OECD countries, after the United States.

However, 53% of GDP is held by the consumer sector, which makes the economy vulnerable to an increase in import prices due to a weaker Japanese yen.

Japan has intervened heavily in order to prevent a strong Japanese yen from hurting export competitiveness, and it has occasionally stepped in to stop it falling.

Japan was the last to intervene in yen falls during the Asian Financial Crisis 1998, when the dollar was above 146 yen.

Analysts consider such a move unlikely at the moment, though some analysts view 125yen as an option.

A Reuters poll of businesses earlier in the month revealed that around a third expected lower profits if the yen continues to weaken.

RECEIVE LESSER BANG FROM YOUR YEN

A battered currency, which has pushed Japanese households to the margins, means that they are paying less. This is important for policymakers.

Due to the yen’s declining value, brand-name imports have seen their prices rise. These include luxury vehicles to high-end watches and smartphones to food like U.S beef imports.

In Japan, for example, the cost of an iPhone 3G has tripled to 190,000. Approximately 60% of Japan’s average monthly salary is achieved by the iPhone 3.0 price. However, over this period salaries have remained largely unchanged.

Haruhikokuroda, Bank of Japan Governor maintains that the upsides to yen falls still outweigh them. But this opinion is not universal.

According to a source familiar with the matter, “The current weakness in the yen is quite negative and undermining Japanese buying power over the long-term.” The government source said that the issue was important because it highlights the need for Japan to reduce its public debt and increase productivity.

Central bankers also recognized the difficulty.

Junko Nakagawa, BOJ member and board member said that a weakening yen can give major overseas companies a boost in profits. This was according to Bloomberg’s interview on Friday. A weak yen can cause problems for domestic firms by increasing import costs.