When a currency depreciates, exports should rise. Not in Japan. Why?
By T.B.
WHEN a country’s currency loses nearly a quarter of its value, its exports normally pick up. The profound effect of depreciation on exports and on GDP can provoke currency wars and harsh words among central bankers. Yet in Japan the relationship has broken down. The yen is down by around 22% since the end of 2012, but rather than rising, export volumes actually fell by 1.5% in 2013 and by 0.4% between January and August this year. Why?
Four explanations are jostling for position, some more palatable to Japan’s leadership than others. The first and most straightforward is that Japan’s trading partners are only now recovering from the recession that followed the financial crisis of 2007-08. Another explanation is that carmakers, which account for a large chunk of exports, have kept prices in local currencies high. They have used the yen’s fall to bolster their profits rather than to sell more cars. This is only fair, they say, because the long period of endaka, or yen strength, pushed them into losses for years. Both of these cyclical reasons should in future ease, allowing exports to rebound.
The third, structural explanation causes more alarm in government circles. For solid commercial reasons, Japanese firms are accelerating their shift of manufacturing overseas. One motive is to be closer to their markets. Neither do they wish to have as much exposure to the yen as in the past. The car industry may as soon as next year make more vehicles overseas than at home. Japan gains in terms of profits repatriated, but domestic factories are left idle. The risk is also that poor corporate governance will allow firms to sit on their piles of profits indefinitely rather than putting the cash to work in the economy.
The most worrying explanation of all is that Japanese products appear to have lost competitiveness, claiming an ever-dwindling share of rich-country exports since 1986. That is partly due to the sheer energy of rising stars like China and the Asian tigers. But it is also down to poor product development, especially in consumer electronics which along with cars drove Japan’s earlier export miracle. If Sony had managed to design smartphones to rival Apple’s iPhone, the story might have been different. As it is, lower exports continue to exert a powerful drag on GDP. Already an object lesson in the effects of unusually prolonged deflation, Japan may add the combination of falling yen and falling exports to its roster of bizarre economic phenomena.
