Yen's drop welcome relief for Japan exporters

Thursday February 26, 5:26 am ET
By Yuri Kageyama, AP Business Writer
Yen's drop is welcome relief for Japan's ailing exporters, but no magic elixir

TOKYO (AP) -- The yen's sudden drop over the last week or so is delivering a glimmer of hope to Japan's big exporters, whose earnings have been battered by both plunging demand and the strong yen.

The yen's drop lifted the dollar to 97.87 yen Thursday afternoon in Tokyo -- its highest since mid-November -- jumping 9 percent from 90 yen two weeks ago.
That's welcome news for Toyota, Sony and other exporters because a weaker yen inflates their foreign income when repatriated to Japan.

"The yen's rise has been abnormal, and so it is good it's starting to be corrected," said Toyota Motor Corp. spokesman Hideaki Homma. "What we want the most is a stable foreign exchange rate."

A major reason behind the yen's retreat is growing pessimism about the world's second-biggest economy, which contracted at the fastest pace in 35 years in the fourth quarter. Political uncertainty, with the prime minister's approval ratings in the single digits, has also rattled investors.

While the yen's retreat will bring some relief to exporters, it likely won't deliver a quick fix to Japan's deep economic woes, said Yuji Kameoka, senior economist with Daiwa Institute of Research in Tokyo.

"It's certain the weakening yen is going to work as a plus for the Japanese economy. But the strong yen isn't the only reason for the economic contraction," Kameoka said.

When the financial crisis erupted last fall, Japan appeared to be in a relatively strong position since its banks had limited exposure to the toxic mortgage-related assets that have poisoned so many U.S. and European financial institutions.

But the drop-off in consumer demand from around the world has hammered Japan's export-dependent economy, and with no sign of a global recovery soon, the outlook for Japan remains grim.

With exports falling at an alarming rate -- down by nearly half in January -- many of the nation's biggest corporations have been slashing production, jobs and earnings forecasts.

And with all the bad economic news, Japanese consumers are holding back, too.

Toyota, the world's biggest automaker, is projecting its first net loss since 1950 for the fiscal year through March and has cut production at many of its factories. The unfavorable foreign exchange rate has been expected to slash more than 1.3 trillion yen ($13.3 billion) from its sales this year.

Sony Corp. is forecasting its first annual loss in 14 years, partly as a result of the 728 billion yen loss on sales it expects from the strong yen for the April-December period. It's also cutting 8,000 workers.

The yen's surge that started in early November was largely driven by the reversal of a popular investment strategy called the yen carry trade that involved borrowing the yen at Japan's super-low interest rates to invest in countries with higher rates of return such as Australia and New Zealand.

When the financial crisis struck, nervous investors unwound those trades to bring money home. That meant returning their yen loans, which raised the Japanese currency's value and caused the dollar to tumble to a 13-year low of 87.11 yen in mid-December.

Now that central banks around the world have slashed their interest rates, those rate differences have diminished, there's also less demand for yen.

Kameoka said he expected the dollar to rise to about 100 yen, but not as high as 110 yen. Still, while the currency's weakness may offer relief for struggling Japan, what it really needs is a recovery in global consumer demand.

"The American and European economies aren't going to mark better growth simply because the dollar rises 5 yen," he said.