Between January 2021 and June 2024, the Japanese yen depreciated by over 50 per cent against the US dollar. This was largely due to higher interest rates in the United States relative to Japan. As long as the US Federal Reserve keeps interest rates high to combat inflation and the Bank of Japan maintains low interest rates to stimulate inflation, Japan will struggle to strengthen the yen.
The weaker yen increases the prices of imported energy and food. According to one estimate, if the yen stays close to 160 yen per US dollar throughout 2024, the average household will pay 90,000 yen (US$585) more than in 2023. This will especially burden poorer consumers. Since a weaker yen raises import prices more than it raises the Japanese consumer price index, costs will rise faster than revenues and squeeze profit margins for Japanese firms. Small and medium-sized enterprises, having less pricing power than larger firms, may suffer more from a weak yen.
The weaker yen may not increase the volume of exports. To maintain price competitiveness, Japanese multinational corporations responded to the appreciating yen between 2007 and 2012 by shifting factories abroad. As a result, evidence suggests that after the 2007–2009 Global Financial Crisis, a weaker yen no longer stimulates Japanese exports.
Despite the drawbacks, a weaker yen ultimately benefits Japanese multinational corporations. As they produce their goods abroad, they repatriate profits to Japan. A weaker yen increases the value of these repatriated profits, benefiting companies such as Toyota and Komatsu.
The weaker yen also improves the tourism balance. Tourist figures for the first half of 2019 and the first half of 2024 show the number of tourists visiting Japan increased by 10 per cent for 2024, while the number of Japanese citizens going abroad fell by 35 per cent. Spending by tourists in Japan increased by 52 per cent in the first quarter of 2024 compared to the first quarter of 2019. In 2024, tourism is Japan’s second leading export category after automobiles.
While the weaker yen has increased the costs of importing energy and food and led to a goods trade deficit, increases in tourism revenues and in repatriated income from abroad has kept the overall Japanese current account in surplus.
The weaker yen should also benefit Japan’s semiconductor and electronic components industries. Electronic components, including semiconductors, is Japan’s third largest export category. In this competitive sector, exporters often keep the dollar price of their exports constant.
During the appreciation period between 2007 and 2012, the strong yen devastated this sector. Yen export prices for electronic parts and components fell 35 per cent relative to yen costs during this time. Producers’ profits tumbled and they were unable to invest enough in capital or research and development to remain competitive. This contributed to Japanese manufacturers losing out to producers in Taiwan and South Korea.
Japan is now trying to rebuild its semiconductor industry. The Japanese government has provided subsidies for the Taiwan Semiconductor Manufacturing Company to build two semiconductor factories in Kumamoto. These factories will employ mature technologies. The Japanese government is also investing in the semiconductor manufacturer Rapidus, which is attempting to manufacture advanced chips in Hokkaido.
The weak yen increases profitability by decreasing the costs of production in Japan relative to the revenues that these firms can earn from exporting. Profitability is crucial for cutting-edge semiconductor firms because of the size of the investment involved in new plants, equipment and in research and development. The ability to invest more because of a weak yen, combined with the strong demand for chips arising from data centres and artificial intelligence applications, will help the Japanese semiconductor sector to succeed.
While the weak yen may not stimulate Japan’s goods exports directly, together with historically weak exchange rates in Taiwan, South Korea, China and other Asian countries, it may increase Asia’s exports.
Many of Asia’s exports to the United States are produced within intricate supply chains. Japan provides key capital goods, parts, components, chemicals and other materials, while South Korea and Taiwan also provide essential parts and components. Final goods are built in countries like China and Vietnam and then exported. When exchange rates throughout East Asian supply chain countries are weak relative to the US dollar it increases the price competitiveness and the exports of these products. The enormous US budget deficits also stoke demand for imports into the United States.
It seems likely that large trade deficits between Asian economies and the United States will continue. The orthodox method of addressing these trade deficits is a combination of expenditure-switching policies, such as an appreciation of Asian currencies relative to the US dollar, and expenditure-reducing policies, such as a reduction in the US budget deficit. But in the current political climate, US trade deficits will likely lead to protectionism. This approach will not make US manufacturers more competitive but it will weaken the global trading system.
A better outcome would involve Asian countries appreciating their currencies together against the US dollar and the United States reducing its budget deficit. While some might question how Asian policymakers could achieve this appreciation, the ability of Asian policymakers to act in their country’s interest should not be underestimated. East Asian countries could appreciate regional currencies by reinvesting pension and insurance funds in domestic or other East Asian assets rather than US assets. Combined with US policies such as reducing its budget deficit, this might slow the protectionism gripping the United States.
August 28, 2024 East Asia Forum
