Strong yen is a problem for the Japanese economy

Introduction

The stage is set for Japan's economy to roar back, but despite all the efforts of the government and corporate sector, the strong yen threatens to undo all the hard work.

Japan's problem is that despite its recent troubles, much of the rest of the world is in an even more fractious state, facing economic slowdowns and debt crises.

In an uncertain world, Japan and the yen are increasingly being seen as safe havens.While this may be reassuring for some investors, there are dire implications for a country that has relied on exports for its growth.The strong yen makes Japan's products less competitive compared with rivals such as China and South Korea.Worse, profits made abroad are worth less when they are brought back home.

Currency losses

Toyota has said that for every yen the currency rises against the dollar it loses 34bn yen ($442m; £271m) in operating profit.The problem is so worrying that the government and central bank intervened in the currency markets on 4 August in an attempt to weaken the currency.It worked, but only for a short time, and the yen has again approached its highest level since the end of World War II, 76.25 to the dollar.

Over the weekend, Finance Minister Yoshihiko Noda was on Japanese television talking tough, hinting the government may step in again.

"An unstable situation is continuing," he told public broadcaster NHK. "As foreign exchange matters are my prerogative I will continue to closely watch the markets and take bold action if it becomes necessary."

The price of failure to bring the currency down could be high.

Over time, Japan's economy could be hollowed out.

A survey of 105 leading Japanese firms showed more than half were considering moving some factories and offices overseas.

Almost as many said the yen staying below 80 to the dollar would depress sales and profits.

Only four said they would be able to withstand the yen dropping below 75 to the dollar and maintain their workforces in Japan.

Power shortages

While the yen may be the headline concern at present, salarymen sweltering in their offices in Japan's stifling August heat are all too aware of the other threat to Japan's economy: power shortages.

The ongoing crisis at the Fukushima nuclear plant means big companies have been ordered to reduce their electricity consumption by 15%, and the first step for many has been to cut down on air conditioning.

Others have reinvented the weekend, shifting the working week to spread demand across all seven days.

But the discomfort and disruption could be as nothing if Japan continues down the path it is on now.

The country looks likely to embark on an extraordinary experiment to see whether it can survive without nuclear power, which before March supplied 30% of its electricity needs.

Confidence in the safety of the technology has been shattered by the disaster at Fukushima, and scares over radiation in beef and other foods have added to the alarm.

Since the disaster, local authorities have been refusing to give permission for reactors in their areas to be switched back on after routine maintenance, which usually takes place every 13 months.

Already two thirds are offline. If public antagonism continues then by early next year none of them will be operating.

Even more severe electricity shortages would be another reason for Japanese firms to cast their eyes overseas.

With the yen as strong as it is, many argue that they just cannot afford to take on any more problems at the moment

Strong Yen could be Next Problem For Japan Automakers

Tough selling to still-wary American consumers might be a problem at the lower end of Japanese automakers' list if currency exchange rates continue their current trend. A soaring yen and a drooping dollar are raising red flags for the bottom line in corporate Japan.

Late last week -- after the yen hit a near high for the year at just more than 88 yen to the dollar -- Honda Motor Co. Ltd. president and CEO Takanobu Ito expressed concern about the yen's ongoing strengthening. Although Honda and many other Japanese automakers, such as chief rival Toyota Motor Corp., produce the preponderance of their vehicles sold in the U.S. inside North America, revenue earned in dollars still must be erodingly converted to yen.

With the global automotive sales environment tenuous and the economies of most large auto-buying nations still sputtering, Takanobu said in an Associated Press report that the currency exchange situation is helping push Honda to a "danger zone" that is hampering fragile recovery efforts.

Meanwhile, Toyota, after some 70 consecutive years of profitability, lost about $5 billion last year and is expected to report a similar loss for its 2009 fiscal year when it is wrapped up in March. The ever-strengthening yen is one factor pressuring Toyota's earnings.

Since early spring, the dollar has declined nearly 10 percent versus the yen and the euro -- and exchange rates were a topic of high interest at a recent meeting of G7 nations, most of which are concerned the slumping dollar will restrain recovery for their struggling economies.

At that same meeting, Japan Finance Minister Hirohisa Fujii insinuated his country -- which has in the past weathered accusations of unofficially tamping down the yen's value -- said Japan would not hesitate to intervene if exchange rates appeared to be moving drastically against the yen. The minister had initially worried economy watchers after initially taking office in September when he insinuated he favored a monetary policy that fostered a strong yen.

Bloomberg reported that Japan hasn't actively played in the foreign-exchange market since its central bank acted to sell a large quantity of yen in 2004.

CONCLUSION

The price of failure to bring the currency down could be high.

Over time, Japan's economy could be hollowed out.

Submitted to: Submitted by:

Mr.Gurdepak Singh Ramandeep kaur

MBA-1’C’

gjimt 2011 account managers C

Saturday, August 27, 2011