Satoshi and Maki Shiraki

TOKYO (Reuters – The weak yen once was a reason to celebrate for Japanese companies. They could sell cameras and automobiles abroad cheaper and make more when the earnings are returned home.

Nowadays, this is not easy.

    After years of bolstering overseas production and supply chains, Japan’s manufacturers now see less benefit from a softer currency, company officials and economists say.

    In fact, the economic pain from a weaker yen has become stark now, as the recent yen sell-off has sharply lifted commodities costs in a blow to household spending. The steady shift towards overseas production also illustrates how this is gradually changing the dynamics in the world’s No.3 economy.

WHAT HAS CHANGED IN JAPANESE COMPANIES?

According to data from the trade ministry, almost a quarter (25%) of Japanese manufacturing is done overseas. This compares with around 17% in a decade and just under 15% 20 years ago.

According to Reuters calculations based upon data from Japan Automobile Manufacturers Association, around two-thirds (or more) of Japanese cars sold annually come now from overseas.

    Two decades ago, cars made overseas accounted for less than 40% of sales.

Companies are also moving away from the manufacture-and-export model of old as technology has changed their businesses. Hitachi Ltd (OTC) Ltd, for instance, is now more focused on providing global digital solutions than only hardware.

What’s the down side risk?

In Japan, the weakening yen has pushed up fuel prices and other commodities. It is also affecting household spending and consumer confidence on the domestic market, which adds to the economic pain.

Tokyo Shoko Research conducted an December survey on nearly 7000 companies and discovered that over 30% thought a weakening Japanese yen would be a disadvantage to their businesses. However, 5% of respondents said it was beneficial. The rest of the 65% stated that it wasn’t a problem or a good thing.

People who claimed that the weaken yen was generally negative cited an average rate of 107yen per dollar as preferred, a figure significantly higher than Tuesday’s 125.75.

Although the weakening yen increases costs of acquisitions overseas, it could not be a problem for most cash-rich Japanese companies. However, Japanese companies are less attractive targets for foreign buyers due to the weak yen.

What’s the OUTLOOK for COMPANIES

Many local manufacturers, such as automakers, believe that producing in smaller markets has the advantage of less sensitive to currency swings.

Although there are concerns regarding the production in China, it appears unlikely that this trend towards offshore production will change in any significant way.

Toyota Motor Corp (NYSE:) Corp worked to lessen the impact the yen has on its earnings. However, a spokesperson did not provide details. The spokesperson stated that the firm did not consider the weakening yen to be a benefit. However, they considered the increased cost of raw material one desert.

The weakening yen is a problem for retailers as it increases costs of everything, from energy to food. Shimamura Co Ltd, an affordable clothing retailer, said that some items would need to be increased by an astonishing 3-4%.

What do POLICYMAKERS STAY?

The Bank of Japan’s governor, Haruhiko Kuroda, has repeatedly said that while the weak currency can squeeze households and retailers, the benefits to the economy https://www.reuters.com/business/finance/boj-keep-rates-low-strong-not-weak-yen-still-kurodas-enemy-no-1-2022-04-01 outweigh the negatives.

While he is increasingly focused on the positive, government officials continue to warn against the excessive decline of the yen.

Kuroda’s old finance ministry colleagues see weak yen a sign that Japan is losing its economic power.

He said earlier in the month that the yen had moved “somewhat quickly” and that was his most severe warning on the currency’s movement. But he also highlighted the positives of having a stronger yen.

HOW LOW CAN IT GO?

That’s anyone’s guess. It’s been a surprise to some that the yen has fallen so quickly against the dollar – its largest monthly decline since November 2016 — which took many in the markets by storm.

Japan’s ex-top currency diplomat Eisuke Saakibara said last month to Reuters that the government should either raise interest rates or intervene in the currency to protect it from a decline of more than 130 against the dollar.

Sakakibara said that a weakening of 130 above “could lead to problems”. Sakakibara is also known as Mr. For his numerous currency interventions that helped to ease the yen during the 1990s, Yen is a well-known figure.