Explainer- Why the weak yen isn’t a big boost to Japan Inc anymore

Explainer- Why the weak yen isn’t a big boost to Japan Inc anymore

Written by Satoshi Sugiyama and Maki Shiraki

TOKYO (Reuters) – A weak yen was once cause for celebration for Japanese companies because it meant they could sell cars and cameras cheaper abroad and saw huge profits when profits came home.

These days, it’s not quite that simple – a point that clearly came home on Thursday when Japan intervened in the currency markets to buy the yen for the first time in nearly a quarter century.

The intervention was aimed at bolstering the volatile currency, which has been hurt by the dollar’s appreciation, driving up prices for everything from food to fuel.

For Japanese manufacturers, a weak yen is less of a benefit than it was decades ago, company officials and manufacturers say, as companies steadily strengthen overseas production and supply chains.

Here is some background information on how the evolving dynamics of the world’s No. 3 economy changed Japan’s reception of a weaker yen.

What has changed for Japanese companies?

Nearly a quarter of Japanese manufacturers’ production is carried out overseas, according to the latest Commerce Ministry data. This compares to about 17% a decade ago and less than 15% two decades ago.

About two-thirds of the cars Japanese manufacturers sell annually are now made overseas, according to Reuters calculations based on data from the Japan Automobile Manufacturers Association.

Two decades ago, cars made overseas accounted for less than 40% of sales.

Companies are also moving away from the old manufacturing and exporting model as technology has transformed their business. Hitachi (OTC:) Ltd., for example, is increasingly focused on providing digital solutions to global customers rather than just hardware.

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What are the side risks?

The weak yen has increased the cost of fuel and other goods for manufacturers at home. More importantly, it also hits household spending and consumer confidence in the local market – adding to the pain of the faltering economy.

And recent rapid declines – the currency has lost about 20% against the dollar since the beginning of this year – are making it difficult for companies to plan ahead.

A weak yen makes it more expensive to get business overseas, although that may be less of a concern for many cash-rich Japanese companies. At the same time, the weak Japanese yen makes it cheaper targets for foreign buyers.

What is the future of companies?

Many manufacturers, including automakers, say one advantage of producing more in local markets is less sensitivity to currency fluctuations.

Although there may be concerns about production in certain markets – such as China – it seems unlikely that the trend towards production abroad will reverse in any meaningful way anytime soon.

Companies also point to the high cost of raw materials as a drawback.

For retailers, the yen’s weakness has been particularly painful, as it drives up costs, including energy and food.

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