Japan's trade data highlights the benefits and problems of a weakening yen

The yen continues to weaken across the board as a result of the Bank of Japan’s (BoJ) massive QQE programme. Late last month the BoJ kicked its quantitative easing programme into another gear, with the bank now looking to expand Japan’s monetary base by around 80 trillion yen annually. This much liquidity being forced into the market, largely through bond purchases, has encouraged even more bears to join the mauling of JPY.

Exports sure as the yen falters

Most policy makers in Japan are cheering the yen’s decline as it is seen to be supportive for Japanese exports. Theoretically, a weaker exchange rate makes Japanese goods more attractive to importers elsewhere in the world. While this is being limited at present by soft global demand and loose monetary policy in other parts of the world as other central banks attempt to soften their own exchange rates, it is still supporting exporters.

In October Japanese exports rose an impressive 9.6% y/y, beating an expected 4.5% y/y rise. This helped to restore some confidence in Japan’s export market after a bout of softer than expected numbers earlier in the year. With the recent moves by the BoJ to aggressively expand its stimulus program and the resulting sell-off in JPY, we would expect more encouraging export numbers out of Japan in coming months.

A weak yen increases the price of Japan’s compulsory imports

However, the exact opposite may be the case for Japanese importers. While a soft yen makes Japanese goods more attractive to offshore buyers, it also increases costs for Japanese importers. Japan relies heavily on imports, especially commodities, and some of these imports are not optional, thus rising costs for importers mean less cash to go around. October’s trade figures show us that the optional imports are already lessening, with imports only rising 2.7% y/y. Admittedly, there are other reasons why Japanese imports didn’t growth by as much as exports from a year earlier, but the falling purchasing power of importers is definitely concerning.

Exports vs. imports

This raises the question is, are the benefits to exporters of a weaker exchange rate going to outweigh the negative implications for importers? It’s a difficult question to answer given the need for both exports and domestic demand to support growth. We are concerned that Japan’s reliance on imports makes Japanese companies overly sensitive to higher import prices, thereby limiting their ability to support the broader economy through higher wages and reduced costs. Overall, the weaker the yen gets the more likely it will do more harm than good to economic activity in Japan.