Japanese exporters looking to boost shipments after the first monthly decline in more than a year can’t rely on a weaker yen for support, according to economists led by Mary Amiti of the Federal Reserve Bank of New York.
While depreciation typically favors exporters, a decline in the yen would boost the cost of the fuel imports needed by Japanese companies to manufacture products, according to a post today on the New York Fed’s Liberty Street Economics blog.
“Yen depreciation drives up the marginal costs of Japanese exporters,” Amiti wrote, with Oleg Itskhoki of Princeton University and Jozef Konings at University of Leuven. This “results in a smaller share of the depreciation being passed on into their export prices.”
Prime Minister Shinzo Abe is deploying a three-pronged program of monetary easing, government spending and business deregulation as he seeks to lift Japan from two decades of economic stagnation. His measures have yielded mixed results, with exports falling for the first time in 15 months in May after the economy expanded at the fastest pace since 2011 in the first quarter.
The yen strengthened 0.2 percent to 101.88 per U.S. dollar as of 2:12 p.m. in New York. The currency is forecast to slide to 106 by the end of the year, after gaining 3.4 percent since Dec. 31.
Japan’s fuel imports have surged since the 2011 earthquake shuttered nuclear plants across the country, with imports rising from 4.4 percent of gross domestic product to 5.9 percent, Amiti wrote.
“The replacement of nuclear power with imported fuels works to increase the impact of the weaker yen on the production costs of exporters,” Amiti wrote. The economists’ study appears in the American Economic Review’s July edition.