On Oct. 22, Wall Street traded the U.S. dollar against the yen at 75.78. This new postwar high is seen as a threat to Japanese exporters – raising the price of Japanese exports outside the country, and threatening the Japanese economy.
Some experts argue that the “real” value of the dollar, when the consumer price index is taken into account, is about 120 yen. According to these observers, the strength of the yen is largely relative: Since the Bank of Japan has not followed the path of some other nations’ central banks of implementing quantitative easing (creating money), and inflation has not been a problem here, the yen has become “paper gold” — holding its own against the comparatively weak dollar, euro and other global currencies.
Rather than dilute the yen’s value, Japan’s Ministry of Finance has been borrowing yen (bonds) and purchasing other currencies to support their values against the relatively strong yen, but this has been an expensive Band-Aid: About 40 trillion yen have been lost on this exercise over the past three years, according to Stephen Church, an economist for Japaninvest in Tokyo.
Where does this leave exporters?
Since Japan is competing with other exporting nations, such as Korea and China – the former having a relatively weak currency and correspondingly favorable exchange rate — things do not look good for Japanese exporters.
For Japanese companies to export successfully, especially to Asian markets, domestic costs must be lowered. This inevitably lowers wages at the bottom levels of the supply chain. This deflationary trend then causes the value of the “paper gold” to rise compared to other countries’ currencies, making it still more difficult to export, and producing a vicious circle.
Japanese manufacturers of large-ticket items such as TV sets, vehicles, etc., are in contrast to Taiwanese makers, who likewise operate with a strong currency, but specialize in key markets, thereby avoiding head-to-head competition with Korea, Church noted.
“Although “rebels” within Kasumigaseki have called for a revision of this trend, their voices have not been heard: they were consigned to the outer darkness prior to the ascension to power of the Democratic Party of Japan,” Church said.
There is hope in the form of specialized SMEs (small- and medium-sized enterprises), such as those with world-class expertise in robotics and machine tools, for example. However, this would require extensive reforms to tax and other policies as well as a complete change of outlook away from these businesses as simply suppliers to large enterprises, suffering constant cost pressures.
Although Japan’s “paper gold” is currently harming Japan’s economy, it is possible to envision a future in which it could become an asset.