by Jeff Allan
The combination of Abenomics and the Bank of Japan’s monetary easing policies has significantly weakened the yen over the last several years. Compared with highs of 75 yen to the US dollar in 2011, as of this writing the yen is now trading at 120 to the US dollar.
One prospect of a weaker yen has always been that it holds the potential to make Japanese manufacturing more competitive in the global marketplace. Naturally, the question posed by economists and investors alike is when to expect the massive recovery within Japan’s export-reliant manufacturing industries.
So far, the recovery has been difficult to predict. Export-oriented industries have definitely seen notable growth over the last year, but the rate of growth has fluctuated. This is primarily due to other economic factors that have taken their toll on Japanese businesses, and put a damper on growth. Analysts, however, see broader export recovery on the horizon for Japan over the mid to long term.
The Role of a Weakened Yen
The yen’s decline has been central to the first two arrows of Abenomics. The government targeted these fiscal stimulus and monetary easing initiatives at stimulating the economy and promoting spending, while also combating deflation. As noted earlier, these initiatives have also had the added benefit of making Japanese manufacturing more competitive with neighboring rivals in China, South Korea, and Taiwan.
To that end, the weaker yen has been successful. As reported by the Nikkei Asian Review in February, the Bank of Japan’s Export Price Index indicated that electronic component and device prices had decreased by 3.4 percent in January when compared with the 2013 average on a contract currency basis. There is no doubt that the weakened yen is pushing down the price of Japanese exports.
Admittedly, the export recovery took some time to commence. Starting back in 2013 and continuing through 2014, the financial media was reporting on the lack of export recovery, even as the yen hit new lows against the dollar. A Bloomberg article from August 2014 quoted an economist at a leading investment bank, who said that the BOJ’s efforts to weaken the yen had done little to boost exports and expand the economy.
The problem, though, was not a flaw in the BOJ’s strategy to weaken the yen. In the face of two decades of economic stagnation and a yen that had strengthened to 75 to the dollar by 2011, Japanese companies had employed a host of optimization and cost-cutting measures. Formerly export-reliant companies had outsourced nearly a third of their production overseas by the time the yen started to weaken. This was in stark contrast with the bubble-era of the 1980s when only 10 percent of Japanese manufacturing was outsourced.
Those outsourcing numbers are beginning to see a reversal, however. Major players like Canon have announced plans to onshore much of their overseas production in the coming two years. Canon plans to have over half of its manufacturing back in Japan by 2017. Despite the initial delay, these moves are allowing Japanese companies to begin leveraging the cost-competitiveness of domestic manufacturing that the weakened yen has allowed.
Analysts were excited to see phenomenal double-digit export growth in December and January. There was some hope that this might actually be the start of the long-awaited export revival. January alone experienced 17 percent growth in exports, helped by recovering demand in the United States and other markets.
Some of that enthusiasm deflated in February, when exports only rose 2.4 percent in value. It was a sharp decline in growth, but still beat analysts’ estimates of 2.1 percent. Most analysts, though, believe that the February downturn was merely a result of the timing of the Chinese lunar new year holiday. Hidenobu Tokuda, a senior economist at Mizuho Research told the Fiscal Timesthat the slowed growth was “a temporary phenomenon related to the Lunar New Year, and I see no change to the overall trend that exports will continue to recover.” That seems to be the industry consensus, with others like BNP Paribas also stating their belief, as reported by theWall Street Journal, that exports would “remain on the mend.”
Sectors and Markets to Watch
According to the Japanese Ministry of Economy, Trade, and Industry (METI), manufacturing machinery and automobile exports drove much of the December and January growth. Fuji Heavy Industries, which makes the Subaru brand of cars, has seen nearly 23 straight months of export volume growth. Nissan also saw a 41.3 percent increase in exports for January compared with a year earlier.
Likewise, parts and components for smartphones and similar consumer electronics are increasingly looking like a prospective area. TDK expects record sales this year, as it continues to move smartphone components to major players like Apple. Murata also plans on a 19 percent increase in sales due to a combination of the weakened yen and their strong domestic manufacturing capabilities.
The United States has provided the most demand for Japanese exports, while markets in Asia, including China, have slumped in recent months. As of February, exports to the United States have grown 14.3 percent for the year, while exports to Asia were down 1.1 percent.
Japanese exports have not yet reached the point of full revival, but there is every indication that they are heading in that direction. If current monetary and domestic manufacturing trends continue, there is a very good chance that we are on the verge of more stable growth that will deliver impressive results.