Yen's relentless slide revives Japan's interest in structural reforms
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[May 30, 2024] By
Makiko Yamazaki and Takaya Yamaguchi
TOKYO (Reuters) -Japanese policymakers are turning their attention to
more structural economic factors behind persistent yen declines,
convinced that market intervention is limited in its ability to reverse
the currency's broader slide.
Data due out on Friday is likely to show Japan spent roughly 9 trillion
yen late April through early May to slow the decline in the yen, which
hit a 34-year low below 160 to the dollar.
While the wide U.S.-Japan interest rate gap is typically blamed for the
yen's declines, the currency's persistent weakness has alerted
policymakers to other more fundamental drivers such as Japan's dwindling
global competitiveness.
Spear-headed by Japan's top currency diplomat Masato Kanda, the Ministry
of Finance (MOF) set up a panel of 20 academics and economists this year
to drill into the country's current account for reasons behind the
structural issues.
However, Kanda has said foreign exchange itself is not within the scope
of the panel's discussion.
During its four meetings since March, the panel discussed measures to
strengthen Japan's global competitiveness and divert profits earned
overseas to boost domestic growth, according to presentation materials
and minutes released by the ministry.
"The Japanese themselves are no longer investing in Japan. Profits
earned overseas are not returning home and reinvested aboard, while
inbound foreign direct investment remains small," a senior government
official said.
"This issue needs to be addressed with structural reform," said the
official, who spoke on condition of anonymity.
Structural economic reform has remained the most elusive part of former
Japanese Prime Minister Shinzo Abe's signature "Abenomics" strategy,
launched a decade ago, as ultra-easy monetary policy kept uncompetitive
companies alive.
"Essentially, Japan's economic fundamentals must change for the
currency's relative value to change," another government official said.
Exchange-rate intervention can hamper speculative moves but cannot
reverse the yen's long-term weakness, nor is it designed to do so, the
official said.
REAL DEFICIT
Japan ran a current account surplus around 21 trillion yen ($134
billion) last year, MOF data showed, a sign the country still earns more
money than it spends overseas.
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A Japan Yen note is seen in this illustration photo taken June 1,
2017. REUTERS/Thomas White/Illustration
But the composition of the surplus has undergone major changes over
the last decade that may be weighing on the yen.
Trade no longer generates a surplus, reflecting a surge in the cost
of energy imports and an increase in offshore production. Japanese
manufacturers with overseas operations now produce roughly 40% of
its goods outside the country, according to a survey by the trade
ministry.
Japan now offsets the trade deficit with an increase in surplus in
primary income from securities and direct investment overseas, as
more firms embark on acquisitions of foreign firms in pursuit of
growth abroad.
But the bulk of such income earned overseas is re-invested abroad
instead of being converted into yen and repatriated home, which may
be keeping the currency weak, analysts say.
Daisuke Karakama, chief market economist at Mizuho Bank, estimates
that only about a third of the 35 trillion yen in primary income
surplus last year may have returned home.
In cash flow terms, Japan might have suffered a current account
deficit last year as its primary income surplus likely was not
enough to offset payments for trade and services, he said.
"Demand for yen may not be as strong as the 20-trillion-yen current
account surplus suggests," said Karakama, who is a member of the MOF
panel.
The panel is due to compile its proposals around June.
Japan could face more trouble if households lose faith in the yen
and shift their 1,100-trillion-yen worth of cash and deposits
overseas, says Tohru Sasaki, another panel member who is chief
strategist of Fukuoka Financial Group.
"There are already some signs," he said, such as the popularity of
foreign stocks under Japan's tax-free stock investment programme.
($1 = 157.1800 yen)
(Reporting by Makiko Yamazaki and Takaya Yamaguchi; Additional
reporting by Tetsushi Kajimoto; Editing by Sam Holmes)
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