Has the decline in Japanese Yen currency boosted the country’s export volumes?

Bloomberg News reported on January 30, 2014 that despite the combination of a declining Japanese Yen currency, and profit growth being experienced by many Japanese corporations since Prime Minister Shinzo Abe took office in early 2013, export volumes have fallen by approximately 1.5 percent in 2013 on a year-on-year (yoy) basis. This is also despite that the Japanese Yen currency has fallen by approximately 12.0 percent in 2012, versus a 7.8 percent surge in 2006.

Students in economics might have understood the dynamics of currency fluctuations and its impact on trade flows, which is supposed to be an indirect relationship, meaning a decline in the value of the domestic currency will gradually translate to higher export volumes, assuming other conditions remain constant. However, the fall in the Japanese Yen currency did not seem to translate into higher exports volume, and higher domestic investments.

On a related note, the Nikkei Asian Review published a news article on January 30, 2014 that illustrates how Japanese corporations such as Toyota Motors Inc. was able to end the financial year through March 2014 with a group operating profit totalling approximately more than Japanese Yen (JPY) 2.30 trillion (USD 22.09 billion). This is equivalent to almost 70.0 percent gain which would push the automobile manufacturer past the record of JPY 2.27 trillion it generated during fiscal 2007, prior to the Lehman debacle during the fall of 2008. However, looking into the details illustrated in the article, most of the sales seemed to be originated from North America, Asia, and other expanding auto markets. The auto maker has a large vehicle assembly plant located in the North American city of Lexington, Kentucky, with sales transactions of the Camry sedan remaining brisk in North America, and the brand was voted as one of top selling vehicle brands in the United States for several years in a row. However, with the combination of consumption taxes slated to be implemented this April in Japan, uncertainties over corporate tax reforms, Japanese corporations in general are reluctant to invest domestically, raise wages, and increase the employment of its domestic workforce.

There could be some possible explanations of the declines in export volumes including the historical strengths of the Japanese Yen currency, loss of competitiveness, lower capital spending, lower research and development expenditures, and loss of talent who have been disappointed by the prolonged downturn of the Japanese economy, among many factors that might contribute to the decline in export volumes. It is not merely a currency issue, but a structural issue which has not been widely discussed or are there any concrete steps coming from the Abe government to think of solutions on how to tackle with the lack of competiveness issues.

There is a need for urgent reforms being implemented to revive the domestic economy, including thinking of incentives to encourage Japanese corporations to spend and invest domestically. In a similar Bloomberg News report on Jan. 30, Prime Minister Abe, along with his cabinet, and the Japan Exchange Co. have launched a stock index called the JPX-Nikkei 400 which will act as an investment gauge with members selected for their profitability and use of cash. However, the plan was being heavily criticised by several members of the financial community, including investment bank, SMBC Nikko Capital Markets Ltd., where it highlighted in a published research report saying that “While Abe makes no mystery of his attempts to engineer inflation to boost the economy, his foray into indexes is less well-known, and may be unprecedented in developed markets.” The bank went on to quote, “The JPY-Nikkei 400 was devised to prod Japan’s biggest public retirement fund into putting more of its JPY 124.00 trillion yen (USD 1.20 trillion) in equities.

Readers might have recalled back in late 2013, a Bloomberg News report did highlight that the one of Japan’s largest government retirement funds has been urged by the Abe administration to plough more of its investment holdings, which had been mostly comprised of low-yielding Japanese Government Bonds (JGBs), into domestic equities in order to reap higher returns coming from the rapid rise in the Japanese equity markets.

The declines being shown in export volumes are certainly quite worrying, especially when Japan is still not relatively out of the woods in terms of economic progress. The International Monetary Fund (IMF) has already placed a forecast of an unchanged 1.70 percent annualised Gross Domestic Product (GDP) growth for the country in 2014, and has expressed its disappointment over the slow progress of reforms, especially on the structural side of policy making. Several market observers have also been quite critical over the government’s slow progress in moving the structural reforms agenda. There was also a comment offered by one of the market economists, Mr. Daisuke Karakama, from Mizuho Bank Ltd. in Tokyo who was quoted by Bloomberg News saying that “It may be time for Japan to formulate an economic policy that is uninfluenced by currency moves.” This is certainly one of the best solutions, but going forward, there is also a question of whether the Abe administration is dragging its feet on implementing structural reforms which would have provided a major boost to the overall competitiveness of the Japanese economy.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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