Negative Impact of Cheap Yen

It is getting obvious for business managers that weak yen may be no longer preferable to Japanese economy. Steep decline of Japanese yen against U.S. dollar is ongoing in foreign exchange market since the beginning of this month. While the tendency enhances competitiveness of exporting products, it has another aspect of raising prices of raw materials from overseas, annoying mid and small business. If income of those businesses does not increase, economic policy of Prime Minister, Shinzo Abe, will be resulted in a failure.

While yen against dollar has been moving within the range of ¥101-103 against $1 since April, it started declining quickly from the beginning of this month. It marked ¥107 on Tuesday for the first time since 2008. The main reason of strong dollar is undoubtedly the speculation of investors that Federal Reserve Bank is going faster than expected to end zero-interest policy and tighten money flow soon. It is reported that investing money is returning back to U.S. after it was disseminated to emerging economies all over the world.

Bank of Japan is making effort to let Japanese economy calm down. “It is a natural shape,” told the Chairman of the bank, Harihiko Kuroda, at the press conference after a meeting with business leaders in western Japan on Tuesday. But in the meeting, there came up voices worrying about exchange rate declining too fast. Chairman of Osaka Chamber of Commerce and Industry, Shigeo Sato, appealed to Kuroda in the meeting that he worried about negative aspect of steep decline of yen.

Cheap yen may improve the balance of exporting business and increase foreign travelers to Japan. However, higher price of energy resources and food products will put greater pressure on corporations and families, making them negative on further asset investment and individual consumption. With no working nuclear reactor for power generation in Japan and psychological damage of consumption tax rate hike, business sectors and consumers are highly reluctant to more spending.

There even is a speculation that yen will decline as cheap as ¥110 to a dollar by the end of this year. It is unclear that further decline leads to more profit for exporters, because they have already shifted their factories to overseas. While Kuroda is still showing calmness with his firm belief of preferable cheap yen, economists are getting careful on negative impact on Japanese economy. It is unrealistic for them to expect appropriate policy from Abe administration, which is enthusiastic on selling political slogan of taking advantage of women power and distribution of job for building infrastructure to the local community.