Kristian Rouz — Over the last several months, the yen has made significant gains against the dollar and is now becoming a major challenge to Japan's economic growth as exports posted declines in April, as a result of weaker earnings for the nation's biggest corporations. The driving force behind the Japanese economy, the zaibatsu, is losing steam, and the nation's Prime Minister Shinzo Abe is facing increasing pressure to expand monetary and fiscal stimulus in order to stave off a likely return of a recession as soon as this quarter.
The main problem facing Abe is rife demand for the yen as haven asset reserve currency, which could preclude any efforts by the Bank of Japan (BoJ) to inject more money into the economy, as it would be likely negated by the market effectively absorbing additional yen liquidity, supporting the expensive yen and thus causing negative exports and growth trends medium-to-long term. Therefore, a structural rebalancing of the Japanese economy toward domestic demand is necessary in order to mitigate exposure to international market risks.
In April, the Japanese exports shrank the most in the past three months, falling an annualized 10.1%, according to the nation's Finance Ministry data and exceeding previous estimates of a 10.0% slump, as well paired with the previous month's decline of 6.8%. The main reasons for the decline in exports has been weakness in emerging markets, a strengthening yen, and slowing overseas demand for manufactured goods, which has resulted in lower earnings for the nation's corporate sector which is the main catalyst for the economy. Whilst a weaker yen could help overcome this negative trend, the currency's safe haven asset is attracting investment capital, meaning the Japanese authorities hardly have efficient leverage to allow them to overcome the lingering slowdown in exports.
"Drops in U.S.-bound car exports were noise," Takeshi Minami of Norinchukin Research Institute said. "Asia and the global economy remain weak. On top of that, yen gains squeeze profits at exporters, causing wages and capital spending to weaken, which would hamper Abenomics' aim of creating virtuous growth."
Previously, Japanese exports posted major declines in January, slowing by 12.9% amidst the carnage of investment capital on Wall Street following the Federal Reserve's hike in interest rates a month prior.
23.3% in April as raw materials and fuel remain cheap. The fall in inbound shipments eased pressure on the corporate sector somewhat and rendered its overall profitability slightly lower as economic activity slowed. Yet, Japan's high exposure to international trade patterns is currently the main risk to economic growth and could derail PM Abe's efforts to expand monetary and fiscal stimuli, providing only limited short-term positive effects.
For instance, one of Japan's leading zaibatsu, Toyota, faces a possible 35% slump in net profits this year thus far. Should the international trade situation deteriorate further, which is quite likely, actual losses in Toyota's profits would far exceed current expectations.
Currently, the yen is trading at roughly 110 per dollar, below its monthly high at 105, but far above its multi-year average of 120-125 yen per dollar.
Nevertheless, Japan's balance sheet in April was still in positive territory, with a trade surplus reported at 823.5 bln yen ($7.50 bln), almost twice as much as previous expectations. This was the third consecutive month Japan posted a positive current account balance. However, this is hardly an optimistic sign, as the news pushed the yen even higher against the dollar and creating a tougher environment for Japanese corporations.
"The April trade surplus was due in large part to weak imports. Still, the data was enough to trigger yen buying," Masashi Murata of Tokyo-based Brown Brothers Harriman said. "The trade numbers came out against a political backdrop that does not favor Japan intervening to weaken the yen, thus making it relatively easy for participants to buy back the yen."
April's trade surplus was biggest in six years for Japan, but the negative consequences of international headwinds affecting the corporate sector might prevail. A preliminary reading of the nation's manufacturing index showed a decline in May and could mean that excessive exposure to global trends might result in a recession returning to Japan in Q2 after PM Abe's fiscal stimulus helped the nation overcome last year's recession in Q1 2016.
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