It's a common trope of economic commentators to regard Japan's economy as being export-led. In reality, Japan's exports as a percentage of GDP are the second-lowest of any developed country: 15.5% in 2020, according to the World Bank -- and this percentage was relatively higher compared to recent earlier years. Only the USA earns a smaller percentage of its GDP from exports (10.2% in 2020, though the percentage had been higher in recently prior years). Cf. France and UK, each 27.9%, and Germany 43.4% (all figures for 2020). [1]
While a weak yen certainly is bad for Japanese consumers, as this post describes, an export-related reason for the policy decision to weaken the yen is tatemae. The real reason for the policy of a weaker nominal yen is the *financial accounting of corporate profits.*
Larger manufacturing companies in the Keidanren manufacture overseas to a greater extent than they export. They earn their profits overseas in foreign currencies like USD or EUR. By converting them into JPY for financial reporting purposes, the weak (nominal) yen makes the profits look bigger -- allowing larger dividends to shareholders and which, given the psychology of markets, also boosts the stock price. This has been especially important under Kuroda, who was brought in just a couple of months after Abe became PM for the second time.
The graph included here makes this difficult to see intuitively. It's simpler to focus on the exchange rates vis-à-vis the main currencies in which companies earned profits, and on nominal rates, since these are most pertinent for financial acounting purposes. E.g., throughout 2012 (last year of the DPJ administration), the JPY was trading at around ¥77 to ¥80 per USD. The yen began to weaken (i.e., more yen per USD) immediately on the start of the Abe II Administration after the 2012 election. By spring 2013 -- the first corporate earnings season of Abe II -- the rate was above ¥100/USD. From November 2013 it's never dropped below that rate, and has spent most of the Abe-Suga-Kishida period well above it, including a peak around ¥125/USD in 2015, and spending the past 5 years, aside from some of the darkest months of the pandemic in the USA in late 2020, above ¥106/USD. [2]
The Euro has shown a similar pattern, moving from around ¥102/EUR during 2012 to above ¥124/EUR within months of Abe's return to power, spending most of 2014-2015 in the ¥130 to ¥140/EUR range, and with only brief dips below ¥120/EUR in the years since then. [3]
This isn't a new policy, so much as being more sustained than in the past. As anyone who was traveling often between Japan and the US or Japan and Europe during the early years of this century (Koizumi, Fukuda, Aso administrations) might recall, it was quite typical to see a weakening of the JPY during the spring months, in time for corporate earnings season.
This post does point out that "the weak yen enriched the country’s big multinational companies." but that statement is ambiguous as to the mechanism, and could be interpreted as attributing the enrichment to exports. For the companies with the biggest revenues, it's due even more to repatriation of overseas profits.
Yes, and there are two more crutches - public deficits and low interest rates. As a side comment, the weak yen increases the domestic purchasing power of the income Japan is earning abroad (income from investments abroad has helped to maintain Japan's current account surplus), but this does not outweigh the loss in international purchasing power caused by the weak yen.
I guess the questions that immediately come to mind is how do you see the opportunity cost of NOT easing and keeping a weak yen ? Also, the velocity of money in Japan is now 0.4 vs 1.1(St Louse Fed) in the US. How do you assess the wider economic risks of such a low and declining V [working with MV=PQ framework]? ..then if we reduce M(oney), the what happens to P(rice) from here and eventually Q? Seems a serious risk..thoughts?
Thank you for such a Informative and useful perspective.
Thanks so much for this. The conversation has evolved since I started looking at this around 1970, but it hasn't changed much!
It's a common trope of economic commentators to regard Japan's economy as being export-led. In reality, Japan's exports as a percentage of GDP are the second-lowest of any developed country: 15.5% in 2020, according to the World Bank -- and this percentage was relatively higher compared to recent earlier years. Only the USA earns a smaller percentage of its GDP from exports (10.2% in 2020, though the percentage had been higher in recently prior years). Cf. France and UK, each 27.9%, and Germany 43.4% (all figures for 2020). [1]
While a weak yen certainly is bad for Japanese consumers, as this post describes, an export-related reason for the policy decision to weaken the yen is tatemae. The real reason for the policy of a weaker nominal yen is the *financial accounting of corporate profits.*
Larger manufacturing companies in the Keidanren manufacture overseas to a greater extent than they export. They earn their profits overseas in foreign currencies like USD or EUR. By converting them into JPY for financial reporting purposes, the weak (nominal) yen makes the profits look bigger -- allowing larger dividends to shareholders and which, given the psychology of markets, also boosts the stock price. This has been especially important under Kuroda, who was brought in just a couple of months after Abe became PM for the second time.
The graph included here makes this difficult to see intuitively. It's simpler to focus on the exchange rates vis-à-vis the main currencies in which companies earned profits, and on nominal rates, since these are most pertinent for financial acounting purposes. E.g., throughout 2012 (last year of the DPJ administration), the JPY was trading at around ¥77 to ¥80 per USD. The yen began to weaken (i.e., more yen per USD) immediately on the start of the Abe II Administration after the 2012 election. By spring 2013 -- the first corporate earnings season of Abe II -- the rate was above ¥100/USD. From November 2013 it's never dropped below that rate, and has spent most of the Abe-Suga-Kishida period well above it, including a peak around ¥125/USD in 2015, and spending the past 5 years, aside from some of the darkest months of the pandemic in the USA in late 2020, above ¥106/USD. [2]
The Euro has shown a similar pattern, moving from around ¥102/EUR during 2012 to above ¥124/EUR within months of Abe's return to power, spending most of 2014-2015 in the ¥130 to ¥140/EUR range, and with only brief dips below ¥120/EUR in the years since then. [3]
This isn't a new policy, so much as being more sustained than in the past. As anyone who was traveling often between Japan and the US or Japan and Europe during the early years of this century (Koizumi, Fukuda, Aso administrations) might recall, it was quite typical to see a weakening of the JPY during the spring months, in time for corporate earnings season.
This post does point out that "the weak yen enriched the country’s big multinational companies." but that statement is ambiguous as to the mechanism, and could be interpreted as attributing the enrichment to exports. For the companies with the biggest revenues, it's due even more to repatriation of overseas profits.
[1] https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?name_desc=false
[2] https://www.xe.com/currencycharts/?from=USD&to=JPY&view=10Y
[3] https://www.xe.com/currencycharts/?from=EUR&to=JPY&view=10Y
Yes, and there are two more crutches - public deficits and low interest rates. As a side comment, the weak yen increases the domestic purchasing power of the income Japan is earning abroad (income from investments abroad has helped to maintain Japan's current account surplus), but this does not outweigh the loss in international purchasing power caused by the weak yen.
I guess the questions that immediately come to mind is how do you see the opportunity cost of NOT easing and keeping a weak yen ? Also, the velocity of money in Japan is now 0.4 vs 1.1(St Louse Fed) in the US. How do you assess the wider economic risks of such a low and declining V [working with MV=PQ framework]? ..then if we reduce M(oney), the what happens to P(rice) from here and eventually Q? Seems a serious risk..thoughts?