Foreign Currency

Japan used $59bn to prop up the yen but consumers may still cut back

When Japanese authorities deployed tens of billions of dollars to try to prop up the weakening yen this week, it was partly with an eye on the growing grumbles from people such as Keiko Shimoharaguchi.

The 60-year-old retired in March looking forward to a foreign trip. But Japan’s tumbling currency is pushing her dream trip out of reach.

“I would like to go to Europe if I could, but I see on TV that even noodles and dumplings cost as much as ¥5,000 [$32.70] in places like Hawaii, so I don’t feel like I can enjoy the trip. All the costs seem idiotic,” said the Kawasaki resident.

“I can’t imagine seeing the kind of strong yen we saw in the past,” she said, even in the face of massive currency interventions seen this week.

Over the course of four days, Japan is suspected of carrying out two market interventions, which the authorities have not officially acknowledged but traders estimated at a combined value of roughly ¥9tn ($59bn).

Economists, traders and companies said the size and urgency of the interventions, pointed to the unprecedented challenges confronting an ageing, shrinking economy that is only just emerging from decades of deflation.

A cheap yen helped drive the inflation, wage increases and corporate profits Japan badly needed to spur the economy. But the pace of the currency’s depreciation and dim prospects of reversing the trend have alarmed consumers, prompting them to cut spending and undermining the Bank of Japan’s efforts to normalise policy after years of keeping rates below zero.

Across the country, households are looking for ways to moderate spending in areas such as long-distance overseas travel. Others are cutting corners on meals, transportation and hobbies as the exchange rate pushes up the cost of imported energy and food.

In Tokyo’s swish Ginza district, a newly opened discount grocery store with the slogan “Everyday Low Price” is selling bento lunch boxes for less than ¥300.

“When I come to Ginza, I always stop at this shop,” said Kumiko, a company executive in her 60s. “With living costs rising, anyone would be happy if prices are lower, and here, most of the things I buy are about 30 per cent cheaper than elsewhere.”

Pedestrians walk on a scramble crosswalk at Shibuya in Tokyo
Analysts said the Bank of Japan would struggle to justify raising interest rates from near-zero levels as long as domestic consumption remained tepid © Kimimasa Mayama/EPA-EFE/Shutterstock

At Miura Kaigan beach, south of Tokyo, the Kitajima family set up a barbecue on Friday, having decided they could not afford an overnight stay at a hotel.

“Obviously the weak yen is part of this. The hotels are pricing themselves for a tourism boom that is happening because Japan seems cheap to foreigners now,” said Kitajima, who did not want her full name to be published. “So we are negatively affected by the cheap yen even if we decide to stay in Japan.”

Companies, too, are worried. Historically, a weaker yen has been welcomed because of the boost to exports and corporate profits earned overseas. But now chief executives warn of higher raw material prices and weaker consumption.

“It’s not just about our company, but this cannot be good for Japan,” said Tadashi Yanai, chief executive of Uniqlo owner Fast Retailing, referring to the plunging currency before the interventions. “I think it’s a bit crazy if there are people who will be happy with the yen’s decline.”

Analysts said the yen’s weakness was a symptom of the gaping difference between interest rates in Japan — where the BoJ will struggle to justify any rate increase as long as domestic consumption remains tepid — and the US, where the Federal Reserve is likely to hold rates higher for longer.

The decline accelerated after BoJ governor Kazuo Ueda appeared to play down the risks of a weaker yen when the central bank kept interest rates near zero last week.

“It is a bit of a crisis situation at the moment [for Japan],” said Takahide Kiuchi, executive economist at Nomura Research Institute and a former BoJ board member. “People feel that the yen will continue to weaken and prices will continue to rise into the future. If wage increases don’t keep up with that rise, then personal consumption will be heavily restrained. So overall, the negative impact of the weaker yen on the economy will be bigger.”

In combination, authorities’ suspected interventions in currency markets have pushed the yen off a 34-year low of ¥160.2 against the dollar. Each time the government has appeared to intervene, though, the yen has quickly resumed its descent.

“Multiple bouts of intervention are not changing the fundamental picture of Japan’s lowest-in-pack negative real policy rate,” said Benjamin Shatil, Japan economist at JPMorgan.

People visit a Nintendo store in Shibuya district of Tokyo
Some companies, such as Nintendo, could enjoy a strong tailwind from the yen’s decline © Philip Fong/AFP/Getty Images

Part of the dilemma for the BoJ is that the softer yen is good and bad for the economy. It has boosted inbound tourism to record levels and helped to attract foreign investment from Taiwan Semiconductor Manufacturing Company, the world’s largest chip contractor, and US tech companies such as Microsoft and Oracle.

Companies with a high proportion of overseas sales, such as Nintendo, Toyota and chip equipment maker Tokyo Electron, are also expected to enjoy a strong tailwind from the yen’s decline. That had helped the Nikkei 225 stock index rise above its 1989 record.

But the benefits of the weaker yen have also declined as Japanese manufacturers shift production overseas to reduce their exposure to currency volatility since being punished by its strength in the wake of the 2008 global financial crisis. With fewer goods produced in Japan, the boost to exports has become more limited.

Investors widely expect the next rate increase to be in July if real wages pick up and consumption recovers. If the BoJ also signals a plan to reduce its bond purchases, that may also help to slow the yen’s decline.

Sceptics such as Kohei Iwahara, economist at Natixis, however, warn that there is little evidence that headline pay increases at big companies will translate to broad-based wage growth and boost service inflation.

“The idea that this time is different [for the Japanese economy] is an illusion,” Iwahara said.

Nicholas Smith, Japan equities strategist at CLSA Securities, said the BoJ’s hoped-for return of domestic consumption was unlikely to happen before the fourth quarter. The end of energy subsidies from the end of May will boost inflation over the summer.

“Pensioners account for 39 per cent of consumption and their payouts likely won’t stay up with such an inflation bump. [The BoJ’s target of] 2 per cent inflation target makes more sense in ivory tower theory than in an economy that hasn’t seen inflation in a generation,” said Smith.

But Matsui, a pensioner in her early 70s, is determined to go on a six-day group tour to Hawaii with her husband in mid-May. “Should we wait until the yen’s slide slows down? That’s for young people to think about. For us, it’s now or never,” she said.

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