is in danger of pricing itself out of the export marketplace. An increasingly strong yen combined with a lingering global economic downturn is having a negative impact on the export sales and profits of Japanese manufacturers and their worldwide distributors.
Unless ’s newly-instated government is prepared to heed exporters’ calls for government intervention, even major Japanese companies may find themselves hurtled into the red through no fault of their own.
Although the yen has strengthened by over 30 per cent against the dollar since June 2007, and considerably more against the South Korean won, ’s Finance Minister initially praised the strong currency, boosting the yen even further.
In response to complaints from struggling exporters he quickly changed his tune but the government still maintains it won’t intervene unless it sees “abnormal movements”.
If the Japanese government’s reluctance is based on the unassailability of its free market economy then it is mistaken. When the free market fails, governments have a duty to act.
As ’s share of the export market erodes, due to untenable price levels, loyal consumers may become accustomed to making do with cheaper and inferior brands, manufactured by ’s competitors. There is no guarantee that they will revert to ‘Made in ’ purchases when the yen is more realistically valued.
Once consumers are scared off by exchange-rate driven pricing and international distributors are forced to cast around for other, more lucrative and easily moveable options, the long-term projection for ’s economy could spell disaster.
According to numerous reports, ’s household names are already feeling the pinch. For instance, Sony’s Vice-Chairman Ryoji Chubachi recently warned that the strengthening yen is making South Korean goods more attractive.
As Sony reports its first annual loss in 14 years, the Korean firm Samsung Electronics is laughing all the way to the bank as it boasts a record income. Sony’s losses are directly related to the strong yen. In fact, every time the dollar declines in value by a single yen, Sony’s annual operating profit is reduced by approximately US$ 11.2 million.
Likewise, Toyota says it is “grasping for salvation” and anticipates a consolidated operating loss of 750 billion yen (US$8.4 billion) during the year ending March 2010. Toyota and Sony are not alone. A recent government survey suggests that over 30 per cent of Japanese companies point to the rocketing yen as being responsible for declining profits.
It may be indisputably true that benefits from a strong currency in terms of imports, while a weighty yen is appreciated by Japanese travelling overseas. But a country that last year derived US$746.5 billion from exports - a hefty proportion of its GDP - cannot afford to allow exporters to sink or swim without a life-raft.
The effects have already been felt. In August, the Finance Ministry announced that exports overall had dropped by 36 per cent since August last year. Steel, cars and electronics are particularly vulnerable due to “sluggish demand”.
It’s a fact that worldwide consumer demand has diminished, but it is worthwhile making a comparison between the plummeting exports of Japanese cars, as opposed to Korean.
While August figures showed a 50 per cent drop in Japanese car exports, South Korea’s vehicle industry posted an export fall of only 15.2 per cent. Since the design, quality and durability of Japanese vehicles is second to none, one can only assume the extraordinary differential is caused by the overly robust yen.
The question is this: what is driving the yen to unprecedented levels against other major currencies at a time when the Japanese economy is on the brink of falling back into recession, exports are down, unemployment levels remain high and government debt is higher than that of any other G20 nation?
The answer is sentiment. In a world buffeted by financial turmoil, investors took flight from high-yielding unstable currencies and turned to the yen - perceived as a ’safe haven’ due to the relative immunity of Japanese banks from the sub-prime crisis. Concurrently, Japanese investors pulled out from the US and Europe to reinvest at home. The consensus is that the yen is artificially high.
So what can a country, whose economy is based on the ‘wisdom’ of market forces, do to rescue its export industry from the perils of a strong currency?
There is a precedent. In 2003/4, the Japanese Ministry of Finance sold yen to buy US$400 billion; a move which stabilised the yen temporarily. Admittedly, on that occasion, the currency swiftly bounced back but this may have been because moved unilaterally without gaining the cooperation of other G8 countries. An internationally coordinated intervention would have a greater long-term impact.
It seems incredible that while other major exporting nations are pulling out all the stops to assist manufacturers, the Japanese authorities are dangerously committed to inaction.
For example, the German government bolstered its ailing car industry with a bailout plan as well as governmental financial guarantees and €2,500 cash incentives to buyers willing to trade their old vehicles for new ones. Likewise, France and Sweden have buttressed their car firms.
If the Japanese government wants to avoid a similar dilemma, and is keen to save its country’s automotive and electronics industries from irrelevance, it must move swiftly. The alternative is an insult to the decades of technological supremacy, innovation and sheer hard work that have made the great economic powerhouse it is today.