Japón deprecia y crece

Pro-Inflation Policies Show Signs of Helping Japanese Economy

Yoshikazu Tsuno/Agence France-Presse — Getty Images

Containers are unloaded at a cargo terminal in Tokyo last month. The Bank of Japan has moved aggressively to reinvigorate the economy and fight deflation.

By HIROKO TABUCHI and GRAHAM BOWLEY

TOKYO — For almost two decades, Japan’s economic fortunes have deteriorated, and little seemed to be done about it.

But in the last few months, the nation’s new prime minister, Shinzo Abe, has pushed policy makers and other officials to take bold steps to revive Japan, one of the world’s largest economies. Their handiwork was evident Friday when the yen hit 100 to the dollar for the first time in four years.

Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar.

In Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.

“Abenomics is about coming out on top in global competition,” Mr. Abe said during a live interview on the Fuji Television Network. “We’re finally seeing a correction of the excessively strong yen.”

The most immediate effect of the weaker yen has been the increase in profits of major exporters. This past week, Toyota Motor reported that net income in the last 12 months had jumped threefold, and Sony produced an annual profit for the first time in five years. Both forecast further profit increases largely because of the weaker yen.

Perhaps more important, particularly for the citizens of Japan, who have suffered from a long period of falling wages and prices, the yen’s move is expected to kindle inflation in the once moribund economy.

The Bank of Japan, the central bank, has moved aggressively to reinvigorate the economy and fight deflation. Last month, it announced a decisive break with its earlier policies. Instead of focusing on keeping overnight interest rates close to zero — which seemed to be having little effect in reviving growth — the central bank aimed to double the amount of money in circulation, seeking to produce annual inflation of about 2 percent.

“This is new territory for the Bank of Japan, and the market is responding to that,” said Aroop Chatterjee, foreign exchange strategist at Barclays Capital in New York. “The Bank of Japan announced very strong monetary policy easing at the start of April.”

However, he said the more immediate catalyst for the rate’s crossing of the threshold was signs of strength in the U.S. economy.

Amari Akira, the Japanese economic revitalization minister, quickly drew attention away from Japan’s role in weakening its own currency, in a bid to stave off accusations that Japan was manipulating the yen to bolster its exports. Rather, he said, the strength of the dollar reflected investors’ hopes for an economic comeback in the United States.

“It’s the dollar that’s in demand because economic recovery in America is gathering steam,” Mr. Amari said at a morning news conference.

The efforts by the Bank of Japan to continue to flood the economy with liquidity are likely to keep downward pressure on the yen in the coming months. The central bank is following an asset purchase program to inflate the economy by aggressively buying longer-term bonds and doubling its government bond holdings in two years.

By Friday night in Tokyo, the dollar was trading at ¥101.42.

Galvanized by the yen’s renewed weakness, the Nikkei 225-stock index jumped more than 400 points, or 2.9 percent, to close in Tokyo at 14,607.54, led by exporters’ stocks.

Japanese officials say the policy does not overtly pursue a lower yen rate, which could raise tensions with other exporting nations, like the United States. But a weaker yen is a welcome development in some ways.

The depreciation of the yen may be a step in the right direction as the authorities try to stimulate some growth. However, Japan still faces many stiff challenges until it breaks out of its period of deflation. It has an aging and shrinking population and cumbersome regulations that make the economy inefficient.

As Mr. Abe has tried to put a new focus on reviving the economy, he has also fought with the central bank’s former leaders over setting the 2 percent inflation goal. Mr. Abe’s pressure in the end led to the resignation of the bank’s previous governor, Masaaki Shirakawa, a moderate, two weeks before his term was up, making way for Mr. Kuroda, who shares Mr. Abe’s economic philosophy.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said some in the market were speculating that the yen had been driven lower by non-Japanese investors. Those investors were anticipating that cash-rich Japanese investors were finally going to start selling their yen holdings to buy bonds from the United States and other foreign countries in a hunt for higher yields outside Japan.

While the weaker yen is good for Japanese exporters, it makes imported products more expensive. That in turn can make selling foreign goods there harder.

In a statement, the American Automotive Policy Council reacted strongly to the currency milestone. “The depth of Japanese currency manipulation has reached a new low,” said Matt Blunt, the council’s president. He said the yen’s weakening would cost the United States exports and jobs.

For Japan, what exporters do with their extra profits will be crucial in determining whether the wider economy gets a similar boost.

Recent data suggest that Japanese exporters are keeping the prices of their goods unchanged, preferring simply to expand profits instead of slashing prices to increase export volumes. (Even if they do nothing, exporters’ overseas earnings are worth more as the yen weakens).

And for now, it remains unlikely that exporters will race to bring investment, production and jobs back to an aging and shrinking Japanese population, despite the lower local costs associated with a weakening yen.

If “companies are unwilling to spend or invest in the domestic economy, then there is likely to be no positive contribution to” gross domestic product, Paul Donovan, global economist at UBS, warned in a report early Friday.

Meanwhile, there are already concerns that too weak a currency could bring pain to a nation dependent on imports for energy and food. The Fukushima nuclear crisis, which has all but shut down Japan’s nuclear power program, has already led to surging oil and natural gas imports and rising energy prices.

News shows have breathlessly covered recent price increases in items like tissue paper and canned tuna, perhaps a sign of the shock that prices should rise at all after more than a decade of deflation, rather than any immediate risk to household finances.

The key, economists say, lies in how much exporters will pass on their bigger profits to consumers, by raising wages or hiring new workers. Higher incomes would drive a much-needed recovery in consumption, bringing about a virtuous cycle of rising prices, profits, investment and even higher incomes.

Mr. Abe himself has been publicly pressuring corporate executives to raise pay, declaring on television last month that companies needed to “return favorable corporate earnings to their workers,” prompting a string of companies to declare wage increases or extra bonuses in recent months.

“If wages can rise, then the return to inflation is good news,” Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, said in a recent research note. “If wages are going to be flat or down, all we are going to see is stagflation.”

But Mr. Abe reassured the public Friday, telling Fuji Television that the trickle-down to consumers from the weaker yen was already starting.

Tourism from overseas was already picking up, for example, as foreign visitors took advantage of the weaker yen, he said.

“It might take a year or two for everyone’s incomes to grow, but we’ve already seen things start to improve this year,” he said.

Graham Bowley reported from New York.

New York Times