Japan Institute for National Fundamentals

　
Every time when the Japanese yen depreciates, arguments grow that weakening yen is a bad thing. What Finance Minister Shunichi Suzuki could do at best, in the face of growing pressure, is to hint at market intervention to sell dollars for yen. The government of Prime Minister Fumio Kishida is now required to have a strong determination and strategies to exploit the yen’s depreciation as a chance to revitalize Japan.

Businesses’ hesitance to increase investment or wages

As of September 8, the U.S. dollar stood above 143 yen, indicating that the yen depreciated against the dollar by 26% from late January. The Chinese yuan declined against the dollar by 9.1%, the South Korean won by 16% and the euro by 13%. The yen’s depreciation is remarkable. At a time when the United States continues to raise interest rates, however, it is natural for Japan, the only country retaining a negative interest rate policy, to see its currency weakening against the U.S. dollar.

Remember that the yen’s appreciation after the collapse of asset bubbles in the early 1990s contracted the Japanese market and prompted businesses to go out of Japan, plunging Japan into a vicious cycle. The yen’s depreciation is a leading means to reverse the trend. Japanese companies are coming back to Japan while discontinuing investment and production in China that has inflated its power by attracting massive Japanese money and technologies. Japan’s semiconductor industry, which had lost international competitiveness due to the yen’s previous appreciation, can roll back its South Korean rivals.

The so-called Abenomics economic policy, which started in late 2012, has corrected the yen’s appreciation. Exports’ share of gross domestic product was limited to less than 14% in late 2012 and has continued to rise, topping 20% recently. The yen’s depreciation against foreign currencies make production in Japan more favorable.

The problem is that businesses are still hesitant to use increasing earnings for expanding investment in plant and equipment and wages in Japan.

According to the financial statements statistics of corporations by the Finance Ministry, their retained earnings in the April-June quarter this year increased by 49 trillion yen from the same period last year when the yen started its depreciation. Their annual ordinary profits expanded by 16 trillion yen. In contrast, a rise in their annual investment in plant and equipment was limited to 4 trillion yen. The total of wages, bonuses and welfare expenses decreased by 95 billion yen. Annualized GDP in the April-June quarter rose only by 5.95 trillion yen year-on-year to 547 trillion yen.

If 20 trillion yen of the 49 trillion yen increase in retained earnings is used for investment in plant and equipment and for wage hikes, the industry sector and households may be invigorated. For comparison, government benefits paid under a COVID-19 economic package (100,000 yen per capita) in 2020 totaled 12.88 trillion yen.

Government spending required to break away from deflation

The Kishida administration now must expand government spending for Japan to break away from deflation and encourage the industry sector to put money into the real economy. While Japan’s consumer price hike has exceeded 2%, the GDP deflator indicating a price hike for goods and services produced in Japan has remained negative, indicating that Japan has gone back into a deflationary depression. Under deflationary pressure, businesses remain unable to pass cost hikes on to product prices, hesitating to increase investment in plant and equipment or wages.

Hideo Tamura is a Planning Committee member at the Japan Institute for National Fundamentals and a columnist for the Sankei Shimbun newspaper.