It was called endaka -- a Japanese term for currency strength that sapped the economy -- and reversing it was supposed to help end deflation and stoke growth.
Parts of the recipe aren’t coming out as advertised.
Less than two years since Prime Minister Shinzo Abe took office and championed policies that drove the yen down 16 percent against the dollar, more than a decade of entrenched deflation is in the rear-view mirror.
More elusive is an invigoration of manufacturing, sparking concern the rise in Japan’s cost base from a weaker yen has made it less competitive, rather than more. The evidence is puzzling central bankers and cabinet members, and raises the stakes for Abe’s domestic growth strategy.
“The BOJ predicted that a weak yen would boost export volumes and spur spill-over effects by increasing domestic production and expanding the overall economy -- but that path isn’t working,” said Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc., who previously worked at the central bank. “It raises the question of what the weak yen has done in terms of living standards of the general public.”
Among the data giving pause: Japan’s fuel-import bill rose 1.56 trillion yen ($15 billion) in the first quarter of 2014 from the same period of 2012. Total exports by comparison rose just 1.28 trillion yen. Industrial production is lower now than it was two years ago, and manufacturers have cut 1 million jobs over the past ten years.
The Japanese currency was trading at 102.12 per dollar at 9:07 a.m. in Tokyo, down 0.1 percent. The Topix index of shares climbed 1.3 percent.
When Abe came to power in December 2012, the economy was smarting from the yen’s 34 percent gains over the prior five years. Manufacturers were relocating operations overseas and cutting costs and wages, depressing demand and helping drive consumer price declines that had persisted for over a decade.
“Japan’s most pressing task is to free itself from deflation and the strong yen so an economic recovery can occur,” Abe said in a 2013 New Year’s speech, a week after forming his Cabinet.
His solution: Abenomics, reflationary monetary and fiscal policies to jolt the economy to life, followed by steps to free up businesses to drive growth. A new governor he installed at the Bank of Japan led the charge with unprecedented easing in April last year.
Consumer prices started rising in the following months, an early success for BOJ Governor Haruhiko Kuroda. Exporters’ profits surged, driving a 51 percent rally in the Topix index of shares last year.
This year will see the first back-to-back annual gain of more than 1 percent in core consumer prices since 1992, according to a survey of economists by Bloomberg, underlining the initial success of Abenomics in ending deflation. The economy posted a sixth straight quarter of nominal growth in the three months through March, the longest string of gains in at least two decades.
Yet almost two years after the yen began to tumble on Abe’s reflation plans, export volumes haven’t gained traction. Outbound shipments were down 2.5 percent in June from levels in late September 2012, when the yen began to slide.
“Export volumes haven’t increased as much as expected,” Kuroda said on Aug. 8, while noting higher profits and an increasing appetite for investment.
“The correction of excessive yen strength has been a considerably significant plus for the Japanese economy,” he said.
Japanese electronics makers from Sony Corp. to Sharp Corp. have faced stiffer competition from Apple Inc. and Samsung Electronics Co. A steep rise in purchases of consumer goods from abroad including mobile phones appears set to continue, according to Takuya Hoshino, Dai-ichi Life Research Institute in Tokyo.
Many manufacturers also moved production to lower-cost countries during the period of yen strength, reducing the effect of exchange rates on exports. Honda Motor Co. has more auto-production capacity in North America than its home market and last year exported more vehicles from its U.S. factories than it imported into the country from Japan.
“The positive effect of the weak yen has not been visible because of structural changes manufacturers have gone through,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo.
At the same time, Japan’s import bill has swelled as the weaker yen inflated the cost of the increased foreign energy Japan needs after the Fukushima disaster in 2011 prompted the government to shut down all the nation’s nuclear power plants. The result: record trade deficits -- the shortfall reached 2.8 trillion yen in January -- that have dragged on growth.
“The BOJ’s largest misjudgment was the limited recovery in export volumes despite a significant and sustained decline in the yen,” said Baba.
While policy makers haven’t labeled their strategy a mistake, Finance Minister Taro Aso said Japan should weigh the costs and benefits. The weaker yen may have positive effects, but also boosts prices of gasoline, food and raw materials, he said in parliament in June.
The export recovery “has been somewhat delayed,” Kuroda said last month.
In one of Japan’s biggest manufacturing hubs, companies in the Higashi Osaka area of the nation’s second-largest city are feeling the weight of higher raw materials and fuel costs, according to Yoshiyuki Tatsumi, deputy director of manufacturing support at the municipal government.
Still, the local economy is getting a boost from the weak yen, with some companies reporting higher profits, a pickup in orders and difficulty in finding enough skilled workers.
“Compared to two years ago, I am getting many more queries from companies wanting to build new factories in this area,” said Tatsumi. “I see more shoppers and stores coming up with measures to attract consumers, holding events and offering gift vouchers.”
The prospect of more investment in Higashi Osaka and the bustle Tatsumi sees on the streets points to some success for Abe in building confidence in his growth strategy.
In terms of purchasing power though, or the amount of imports Japan can buy for every unit of exports, the slide in the yen leaves the country worse off, Cabinet Office estimates show.
The deterioration in the terms of trade tripled Japan’s disadvantage over the five quarters through March, mostly due to the yen’s fall, according to the estimates.
Higher costs of imported food, gasoline and electricity are squeezing households that have seen scant income gains, even as Abe steps up calls on corporate Japan to deploy record cash holdings to boost pay.
Food prices jumped 5.1 percent in June from a year earlier, while electricity prices have climbed 30 percent since the Fukushima disaster.
An increase in sales tax last quarter added to the burden, helping fuel 3.6 percent inflation in June -- nine times the increase in total cash earnings.
While Kuroda predicts a tightening labor market will lead more companies to raise wages, the effective reduction in real incomes is weighing on consumption.
Should wages fail to rise, inflation spurred by the weak yen would put the central bank in a bind, said Tetsuya Inoue, chief researcher for financial technology and markets at Nomura Research Institute Ltd. in Tokyo and a former BOJ official.
“Cost-driven inflation will get worse if the yen declines further,” Inoue said. “The economy still needs stimulative support. The BOJ may have to keep a kind of an accommodative stance.”