TOKYO: Few in Japan seem to harbour any illusions that the latest efforts to tame the yen can push it away from record highs far enough and for long enough to make much of a difference.
A look at forces behind the yen's strength suggests possible lasting remedies -- policies that would make the world's No. 3 economy less export-reliant and reduce its unwanted safe-haven appeal. The problem is most would take time and a political consensus that Japan sorely lacks, so in the meantime everyone sticks to a time-honoured ritual.
The script goes like this: Exporters warn how expensive it has become to be patriotic and keep production at home, officials intervene or threaten to do so and offer subsidies and soft loans as painkillers, while markets take it all in stride.
"This has little to do with the yen's strength," Takuji Okubo, chief economist at Societe Generale in Tokyo says about proposed subsidies to firms expanding local production and a $100 billion credit line to help foreign acquisitions.
"It's all about lobbying. Bureaucrats approach companies and ask them what they want and they say this is what we want."
Analysts say companies that shop abroad to take advantage of the yen's strength would have done so without extra incentives, while subsidies will not stem the "hollowing out" of the Japanese manufacturing. The yen is one of many reasons why companies are shifting production abroad: lower taxes, cheaper labour and proximity to markets that grow also count.
Interventions and monetary easing by the Bank of Japan have helped keep aggressive one-way speculative bets on the yen in check, but there is widespread scepticism those can counter market forces supported by trade and investment flows.
So what could work? In the near-term, Japan should focus on pumping reconstruction funds into the economy's bloodstream rather than obsess about the yen, says Naomi Fink, equity strategist at Jefferies Ltd in Tokyo.
"There's 12 trillion yen reconstruction budget that waits for approval. Fiscal policy is of much greater importance than forex or monetary policy and they need to spend it."
In the longer run, Japan could for example start by encouraging more imports, opening up its markets via free trade pacts.
Japanese business has lobbied for such pacts as a way to expand abroad, but they should also boost imports, particularly of agricultural products, lifting demand for foreign currencies.
HOOKED ON EXPORTS
That is important because, despite the outcry over a strong yen, Japan remains a major net exporter and continues to chalk up considerable trade and current account surpluses that underpin the yen.
More ambitiously Japan should tackle reforms aimed at reviving the domestic economy.
They would have a two-fold effect: bring trade flows closer to balance, addressing one source of yen strength, and also make the economy less dependent on exports.
Trade accounts for about a third of Japan's economic output, not much more than in the United States or the European Union as a whole and less than in China, Germany or France, according to the World Trade Organization.
But with shrinking working-age population and stagnant incomes, virtually all growth that Japan manages to eke out is driven by overseas markets.
Masafumi Yamamoto, chief currency strategist at Barclays Capital in Tokyo, says corporate tax cuts advocated as a way of keeping businesses at home were needed, but were not a magical cure given stiff competition from low tax Asian rivals.
A look at forces behind the yen's strength suggests possible lasting remedies -- policies that would make the world's No. 3 economy less export-reliant and reduce its unwanted safe-haven appeal. The problem is most would take time and a political consensus that Japan sorely lacks, so in the meantime everyone sticks to a time-honoured ritual.
The script goes like this: Exporters warn how expensive it has become to be patriotic and keep production at home, officials intervene or threaten to do so and offer subsidies and soft loans as painkillers, while markets take it all in stride.
"This has little to do with the yen's strength," Takuji Okubo, chief economist at Societe Generale in Tokyo says about proposed subsidies to firms expanding local production and a $100 billion credit line to help foreign acquisitions.
"It's all about lobbying. Bureaucrats approach companies and ask them what they want and they say this is what we want."
Analysts say companies that shop abroad to take advantage of the yen's strength would have done so without extra incentives, while subsidies will not stem the "hollowing out" of the Japanese manufacturing. The yen is one of many reasons why companies are shifting production abroad: lower taxes, cheaper labour and proximity to markets that grow also count.
Interventions and monetary easing by the Bank of Japan have helped keep aggressive one-way speculative bets on the yen in check, but there is widespread scepticism those can counter market forces supported by trade and investment flows.
So what could work? In the near-term, Japan should focus on pumping reconstruction funds into the economy's bloodstream rather than obsess about the yen, says Naomi Fink, equity strategist at Jefferies Ltd in Tokyo.
"There's 12 trillion yen reconstruction budget that waits for approval. Fiscal policy is of much greater importance than forex or monetary policy and they need to spend it."
In the longer run, Japan could for example start by encouraging more imports, opening up its markets via free trade pacts.
Japanese business has lobbied for such pacts as a way to expand abroad, but they should also boost imports, particularly of agricultural products, lifting demand for foreign currencies.
HOOKED ON EXPORTS
That is important because, despite the outcry over a strong yen, Japan remains a major net exporter and continues to chalk up considerable trade and current account surpluses that underpin the yen.
More ambitiously Japan should tackle reforms aimed at reviving the domestic economy.
They would have a two-fold effect: bring trade flows closer to balance, addressing one source of yen strength, and also make the economy less dependent on exports.
Trade accounts for about a third of Japan's economic output, not much more than in the United States or the European Union as a whole and less than in China, Germany or France, according to the World Trade Organization.
But with shrinking working-age population and stagnant incomes, virtually all growth that Japan manages to eke out is driven by overseas markets.
Masafumi Yamamoto, chief currency strategist at Barclays Capital in Tokyo, says corporate tax cuts advocated as a way of keeping businesses at home were needed, but were not a magical cure given stiff competition from low tax Asian rivals.
Posted in: Economy
