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Thursday, March 20, 2008
Counting the cost of a weak dollar on the economy
This week saw the dollar slip to its lowest level against the yen in over 12 1/2 years.
Despite bouncing back Wednesday, economists expect the greenback to keep trending downward.
The prospect of a U.S. financial industry meltdown has many here fearing the negative impact of a weakening dollar on the Japanese economy.
The following questions and answers address the recent currency market turbulence:
What impact does a declining dollar have on the Japanese economy?
Japan's economic growth is supported by overseas demand, so it is always vulnerable to currency fluctuations. Nomura Securities Co. estimates a 7.9 percent fall in Japanese corporate profits for the business year that starts in April from a year earlier, if the dollar stays at ¥95 and crude oil at $110 a barrel.
A weaker dollar pushes up the prices of Japanese goods in the United States, the world's largest economy, thus theoretically reducing their competitiveness there.
Many large manufacturers shifted production overseas in the 1990s to lessen their currency risk, but a weak U.S. currency still erodes dollar-denominated profits when manufacturers eventually repatriate them into yen.
What does this mean for specific manufacturers?
Toyota Motor Corp. — the world's second-largest automaker — has said that every yen the Japanese currency gains on the dollar cuts the firm's annual operating profit by ¥35 billion. The automaker earlier forecast January-March profits based on an exchange rate of ¥105. About 70 percent of Toyota's sales come from overseas.
Similarly, Sony Corp., more than 70 percent of whose sales are overseas, said each yen gained against the dollar slices ¥6 billion off its operating profit.
But the situation is not as serious as it was in 1995, when the dollar plummeted to a record low ¥79.
The difference now is that thanks to globalization, Japan is no longer so dependent on exports to the U.S. In the intervening years, Japan has increased its trade with emerging economies, including China, Russia and Southeast Asian countries.
Overall trade with China surpassed that with the U.S. for the first time ever in 2007.
Isn't a strong yen good for the economy, at least for boosting domestic demand?
In general, a weak dollar brings down the prices of imported goods in Japan. But since oil and other materials costs have been skyrocketing, the yen's recent gains have not totally offset the upward price pressure of raw materials, economists say.
For example, crude oil briefly rose above $111 a barrel earlier this week, exceeding by almost seven times the 1995 price of roughly $17 a barrel.
Higher costs for other materials, including iron and steel, are also a burden on some industries.
"The surging yen and rising prices of raw materials are serious problems for the automobile industry," Fujio Cho, chairman of the Japan Automobile Manufacturers Association, told a news conference Wednesday.
Why don't Japanese authorities intervene by selling yen?
Economists say the Finance Ministry, which has avoided currency intervention for the past four years, appears reluctant to step in now partly because the yen is not so strong relative to other currencies.
If the yen's lack of strength against other major currencies and Japan's deflationary conditions are taken into account, the yen's level is above ¥100, they said.
They also argue that intervening to halt the dollar's slide against the yen would be ineffective because the underlying factors do not stem from Japan, but rather from the U.S. market.
Asked about the likelihood of yen-selling, Finance Minister Fukushiro Nukaga told reporters Monday: "We're not thinking about any specific action."