Battered yen buttresses Japan's long expansion http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyid=2007-02-09T075828Z_01_T151599_RTRUKOC_0_US-JAPAN-GROWTH-YEN.xml&from=business
Fri Feb 9, 2007
By Eric Burroughs - Analysis
TOKYO (Reuters) - As the yen's broad value has withered to a 21-year low, the boon to Japan's economy has been such that it's as if the Bank of Japan never lifted interest rates from zero last year.
The fillip from the weakening yen has proved so potent that some economists believe it has been the equivalent of a half-percentage point cut in rates, more than offsetting the BOJ's raising its key rate to 0.25 percent last July.
The economic benefits are believed to be one of the reasons why Japanese officials are sanguine about its broad drop even as policymakers in Europe have increasingly voiced their angst before the Group of Seven meeting in Germany starting on Friday.
"When you've got a focus on trying to boost the economy away from deflation risks, every little bit helps," said Richard Jerram, chief economist at Macquarie Securities Japan in Tokyo.
The impact on exporters and companies has been multifaceted not just by making Japanese goods comparatively cheaper but by also boosting business profits and spurring capital spending.
Such a buoyant business backdrop in turn helped to push the stock market's benchmark Nikkei average to a six-year high last week and should feed into improved household incomes and spending.
But so far consumer spending has been the missing link even as the economy has posted the longest expansion in the post-World War Two period, which is why core consumer prices are rising just 0.1 percent year-on-year and the BOJ has kept rates on hold.
"The key reason underpinning the weak yen is low interest rates. And the reason the BOJ is keeping rates low is that despite five years of economic recovery, household spending is still soft," said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.
Kiichi Murashima, director of economic and market analysis at Nikko Citigroup, said the weak yen makes him optimistic on the outlook for corporate Japan but he's not so optimistic about the spillover of the corporate recovery to the household sector.
Murashima said Japan will see further employment gains but not a meaningful pick-up in wages as Japan's bulge of retiring baby boomers in the next few years are being replaced by younger workers with a lower salary base, and global competition remains fierce.
THE SICKLY YEN
In January the yen's trade-weighted and inflation-adjusted value tumbled to a 21-year low, according to Bank of Japan data. By that broad measure, the yen lost 6 percent of its value in the year to January and some 21 percent in the past three years.
The yen has fallen because of Japan's rock-bottom interest rates, which have prompted some investors to borrow the currency and sell the funds to purchase higher-yielding assets in what is known as the carry trade. Japanese investors have also sought better returns in foreign assets. Economists say the typical formula implies that every 10 percent of depreciation of a currency spurs real economic growth in the next year by 0.3 to 0.4 percent, though in Japan's case usually the dollar/yen exchange rate is used.
The yen fell just 1 percent against the dollar last year, but its slide has been most pronounced against European currencies, hitting an all-time low against the euro last month and a 14-year low against the pound.
"The yen is quite weak against European currencies, so the stimulus this time may be stronger than suggested by the yen/dollar rate," said Murashima.
BOJ board member Hidehiko Haru highlighted the benefits of the weak yen on Thursday by saying the weak yen was a "positive" for exports and achieving stable growth, but central bankers have also noted the potential problems. BOJ Governor Toshihiko Fukui told Reuters in an interview last month that if companies believe interest rates will stay low for a long time and the yen will stay weak, "it could no doubt make the economy more volatile, even though there are no such risks at present".
For now, analysts believe Japan is unlikely to stand in the way, especially when it has not intervened in currency markets in about three years, the economic expansion remains patchy and markets feel comfortable driving the yen lower.
Japan spent a whopping 35 trillion yen in the 15 months to March 2004 to stem the yen's rise against the dollar when authorities in Tokyo felt such currency strength threatened the economy's recovery from deflation. But since then it has done nothing.
"The government hasn't intervened in the exchange rate market for a long time now," said Shiraishi at Lehman Brothers.
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