Yen’s relentless slide revives Japan’s interest in structural reforms

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 US-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.

Spearheaded 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 (S$181.3 billion) last year, MOF data showed, a sign the country still earns more money than it spends overseas.

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 per cent 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. REUTERS