Yen’s Surge Threatens to Wipe Out Japan’s Recovery From Quake

The yen’s biggest monthly advance since 2008 is threatening profits of exporters from Nissan Motor Co. to Sony Corp., endangering the nation’s rebound from March’s record earthquake.

The currency was at 77.41 per dollar at 6:04 p.m. in Tokyo, 7 percent higher than the 82.59 average exporters used in profit forecasts in a Bank of Japan survey released last month. Toyota Motor Corp. sees a yen stronger than 80 as a brake on growth and Finance Minister Yoshihiko Noda said today the yen is overvalued.

Japan’s “Mr. Yen,” former top currency official Eisuke Sakakibara, forecasts it will climb as high as 75 after already reaching a postwar record of 76.25 in March. With reconstruction efforts bogged down in political wrangling, the yen’s advance may add pressure on Prime Minister Naoto Kan to quit and push the Bank of Japan to inject more money into the economy.

“The strong yen is the biggest uncertainty facing Japan’s economic recovery,” said Eiji Hirano, a former BOJ executive director and now executive vice president at Toyota Financial Services Corp. “Japanese companies were doing all they could to get back on their feet, helping the nation rebound faster than expected -- the strong yen could kill all of the optimism that was built up on that.”

Sakakibara, who spoke in Tokyo last week, didn’t provide a timeframe for his projection. He directed exchange-rate policy at the Ministry of Finance between 1997 and 1999 and became known as Mr. Yen because of his efforts to influence the currency’s rate through comments and intervention.

Intervention Risk

Noda declined to comment on intervention when asked at a press conference in Tokyo whether the government would sell the yen to stem its gain. The Nikkei newspaper reported today that Japanese officials are preparing to sell the yen, without citing a source for the information. The BOJ may also weigh easing monetary policy at an Aug. 4-5 board meeting, the newspaper said.

Authorities stepped in unilaterally last year for the first time since 2004 after the yen surged to its highest since 1995. They did so again in March, this time in a coordinated operation with the Group of Seven, when it appreciated more than 3 percent in the week following the quake to a postwar high of 76.25.

The Japanese currency’s strengthening past 80 yen to the dollar is slowing the nation’s economic recovery, Toyota Motor President Akio Toyoda said on July 19. The Toyota City, Japan- based company today raised its full-year profit forecast 39 percent to 390 billion yen because of a faster-than-anticipated recovery from the aftermath of the earthquake, when factories were shut.

Eroding Profits

A stronger yen cut Toyota’s operating profit by 50 billion yen, the company said today. Its quarterly results were based on 82 yen to the dollar and 117 yen to the euro. For the year, the company is basing its full-year forecasts on 80 yen to the dollar and 116 yen to the euro.

Sony, Japan’s largest exporter of consumer electronics, slashed its profit estimate by 25 percent, citing lower demand for its televisions in Europe. It also cut its sales projections because of the higher yen.

Nissan Motor is worried about the impact of the currency’s appreciation on jobs, Corporate Vice President Joji Tagawa said on July 27. The company said the stronger currency shaved its operating profit by 55 billion yen ($715 million) in the quarter ended June 30.

“We’re at our limit,” Tagawa said before more gains that took the yen’s advance for July to about 5 percent.

BOJ Concern

BOJ officials in the past week have voiced more concern about the currency, with board member Hidetoshi Kamezaki saying the bank would need to act “proactively” should the yen’s gains pose a threat to growth and prices. The stronger currency, in addition to a nationwide power shortage triggered by nuclear plant shutdowns since March, may encourage companies to move factories and jobs out of the country, he said.

“If this becomes a trend, it’ll likely accelerate the shift of production overseas,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo, referring to the appreciating currency. Lack of action by authorities “is just another sign that Japan has no strategy to revive its industries, a great contrast with nations like South Korea, where the government clearly supports industries.”

The fallout from the stronger yen may dilute the government’s efforts to rebuild the nation after the natural disaster left more than 20,000 dead or missing. Kan last week pledged 19 trillion yen in outlays over five years for reconstruction.

Smaller Impact

The effect of the earthquake-relief stimulus “will be smaller if the yen continues to stay at this level given that corporate sentiment will cool and that will lead to sluggish capital spending and hiring,” said Masamichi Adachi, a senior economist at JPMorgan Chase and a former Bank of Japan official.

Efforts to roll out more government spending to spur growth have been hampered by rising calls from ruling and opposition lawmakers for Kan to step down. The prime minister’s approval rating slid to 19 percent last month compared with about 70 percent when he took office in June 2010, according to a survey by Nikkei newspaper and TV Tokyo between July 29-31.

Gross domestic product for the year ending March would be cut by 0.8 percentage point if the yen trades at an average of 75 per dollar in the second half of the fiscal year, according to Toshihiro Nagahama, chief economist in Tokyo at Dai-Ichi Life Research Institute, the research arm of Japan’s second-largest life insurer. Nomura Holdings Inc. estimates that growth will be reduced by 0.24 percentage point with the yen at that level and 0.49 point if it trades around 70.

Growth Outlook

The central bank is projecting a 0.4 percent expansion for the year.

“Companies had been forecasting a rebound in profits in the second half, but if exporters’ profits are strained and that depresses stocks, we’ll need to start to worry about the effect that will have on economic growth,” Nagahama said.

Japan’s economy probably contracted in the second quarter and is forecast to rebound from the period starting July 1 as export demand and reconstruction projects fuel growth, according to economists surveyed by Bloomberg News.

Former policy makers and analysts have said the central bank may need to bolster stimulus to ease the damage the yen will have on profits and the economy. The central bank doubled its asset-buying fund to 10 trillion yen after the March temblor caused stocks to plunge and the yen to surge. The BOJ also cut its benchmark rate close to zero last October after the currency climbed to a 15-year high against the dollar.

Liquidity Injections

“The BOJ needs to buy a significant amount of government bonds to provide ample liquidity,” Sakakibara, who is currently a professor at Aoyama Gakuin University, said at a forum in Tokyo on July 27.

Sakakibara said the BOJ’s failure to ease policy enough was one reason behind the yen’s advance. “I hope Japan follows the example of the U.S. and does quantitative easing rigorously.”

The BOJ board may wait for more evidence that the global outlook has deteriorated rather than just evaluating underlying currency moves, analyst Maiko Noguchi said.

“Recent move don’t necessarily dictate direct action from the BOJ given they’ve said they don’t target specific foreign- exchange levels,” said Noguchi, an economist at Daiwa Securities Capital Markets in Tokyo. “The decision to ease policy further will probably require stronger evidence that the global economy is stalling.”

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Lily Nonomiya at lnonomiya@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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