Japanese Prime Minister Shinzo Abe may have won a landslide victory in weekend elections but the strong yen is threatening to spoil the party as it undermines his economic stimulus policies by hurting the earnings of the nation’s exporters and companies who have big overseas operations.
If it continues to strengthen significantly, the yen would discourage domestic capital spending by exporters and inflict severe damage on a fragile economy, policymakers and analysts warn.
Regarded as a safe haven at times of market turmoil such as that caused by Britain’s vote to leave the European Union, the yen has strengthened to around 103 to the dollar and 114 yen versus the euro, above 105 yen and 120 yen – the respective average rates on which Japan’s big automakers base their budget for the current financial year.
It reached a two-and-a-half year high of 99 yen to the dollar late last month, up more than 20 % from its weakest recent level at around 125 yen in August 2015.
It has been weakening in recent days on hopes that Abe’s victory would lead to more government spending and monetary stimulus.
The forecasts for reduced revenue and earnings are coming thick and fast ahead of the release of quarterly earnings.
SMBC Nikko Securities estimates that Japanese corporate profits overall will shrink 26.1 % in the current fiscal year to next March 31 if the dollar averages 100 yen.
Japanese automakers will take a hit of around 17-18% to their full-year operating profit from the strong yen, according to forecasts from analysts at Goldman Sachs and JPMorgan. And automotive chip maker Renesas Electronics Corp says a one-yen rise against the dollar would slash ¥1.1bn ($10.7mn) off its operating profits, and complains of rising costs of investing in production in emerging countries like Vietnam.
“To cope with the impact of forex fluctuations, we want to further shift the cost structure of our overseas development operations,” such as making more overseas payments denominated in dollars to avoid yen gains from boosting costs, Renesas President Bunsei Kure told Reuters on June 30.
In their planning, many companies haven’t taken the currency strength on board.
The Bank of Japan’s quarterly “tankan” survey released on July 1 showed big manufacturers expect the dollar to average 111.41 yen in the current fiscal year, a sign they have yet to take into account the pressure on profits from the yen’s spike.
“The yen’s appreciation is worsening business sentiment and corporate revenues, particularly for exporters,” Atsushi Miyanoya, the BoJ’s branch manager overseeing the Kinki western Japan region – home to electronic giants like Panasonic Corp and Sharp – told a news conference on July 7. “Many companies set their assumed dollar/yen rates around 110 yen, so recent yen rises would heighten downside risks to corporate revenues,” Miyanoya said.
Even retailers weren’t spared.
Japan’s biggest retail group Seven & i Holdings saw its quarterly revenue for the three months through May fall 3.2% from a year earlier, with the stronger yen eroding revenue by ¥15bn.
Seven & i, which operates the 7-Eleven convenience store chain in Japan and some other parts of the world, earns about 30% of its income from abroad, meaning that it gets hit when money earned outside Japan is translated into yen.
To be sure, not all companies in Japan will be hit by the strong yen, which erodes exporters’ profits but slashes import costs for retailers and boosts households’ purchasing power.
Companies that serve Japanese customers rather than export markets are better protected against the impact of the strong currency and can actually benefit from cheaper import costs.
And the yen is still well below a record high of ¥75 posted in 2011.
Hidenobu Tokuda, senior economist at Mizuho Research Institute, points out that capital expenditure is holding up relatively well, led by software investment by non-manufacturers.
“Current levels around ¥100 to the dollar won’t deal a decisive blow to Japanese companies as a whole, nor will it cause the economy to falter,” Tokuda said.
Japanese policymakers have tried to keep those speculating on a stronger yen at bay with threats of currency intervention to stem gains.
But the effect of jawboning is waning on a dominant market view that Tokyo won’t step in given Washington is opposed to such action.
“The government and the BoJ would be in a tough spot if the yen rises to 90 or 80 to the dollar,” said former BoJ board member Sayuri Shirai.
When the yen spiked to record highs in 2011, the government offered subsidies to companies keeping their production base in Japan to prevent them from shifting operations overseas.
While similar measures may be considered if the yen rises further, many firms are resorting to self-help instead of making explicit demands for government action.