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Weak yen and oil rally to cost Japanese families $460 this year

Offshoring has diminished the benefit of currency's decline for manufacturers

The rapid weakening of the Japanese currency has weighed on domestic households. (Photo by Koji Uema)

TOKYO -- The yen's rapid decline coupled with soaring crude oil prices are expected to raise the expenses of the average Japanese household by 60,000 yen ($458) this year, private-sector estimates show.

Japan's currency crossed the 130 yen milestone against the U.S. dollar on Thursday for the first time in two decades. The Bank of Japan's announcement that it is sticking with its ultraloose monetary policy triggered the currency's sell-off.

The benchmark 10-year JGB yield decreased temporarily by 2.5 basis points to touch 0.215%, widening the spread against U.S. yields.

The yen has depreciated by roughly 16 against the greenback this year. A widening Japanese trade deficit caused by soaring commodity prices has accelerated the currency's decline.

If the yen remains at 130 to the dollar, the financial burden will rise by 17,000 yen from last year for households with an annual income between 9 million yen and 10 million yen, according to estimates by Saisuke Sakai, senior economist at Mizuho Research and Technologies.

The higher cost of gasoline and other energy essentials translates to an additional financial burden of 60,000 yen on average for all households, Sakai said. For lower-income households, that is equivalent to more than 2% of its household budget, almost rivaling the 3% hit caused by the consumption tax hike in 2014.

The yen's real effective exchange rate stood at 65.1 points in March, according to an index published by the Bank for International Settlements. The figure is 36% below the reading in April 2002, the last time the yen weakened to 130 per dollar.

This is largely because Japan's consumer price index has risen only 5.5% over the past 20 years. The CPI in the U.S. shot up 60% over the same period. The weak yen will feel heavier on Japanese households and businesses because of the decline in the real effective exchange rate.

The yen depreciation hurts a broad spectrum of Japanese companies. A survey by Tokyo Shoko Research shows 40% of 5,398 businesses saying the weak yen will harm business, while only 4% called the weak currency a positive factor.

The current weak yen is not expected to benefit Japan domestically. Inbound consumption by foreign visitors to Japan, which is a type of service export, has virtually evaporated during the pandemic. Small to midsize businesses account for 99.7% of all Japanese companies, and this contingent hires 69% of employees.

The benefit of a weaker yen for export-heavy Japanese companies has been limited. Between fiscal 2008 -- before the start of production offshoring -- and fiscal 2021, this boost to earnings shrank by more than half for Sony Group and Canon. 

For 15 companies heavily exposed to currency fluctuations, a combined boost to operating profit from a weak yen totaled roughly 88 billion yen in fiscal 2021, 12 billion yen less than in fiscal 2008.

The global financial crisis following fiscal 2008 caused the yen to appreciate sharply, pushing companies to shift more production offshore. Among Japanese manufacturers, the share of offshore production rose to 22% in fiscal 2020 from 17% in fiscal 2008, a Cabinet Office survey finds.

Mazda Motor once reaped a foreign exchange gain of 2.7 billion yen, but the exchange rate now depresses earnings by 300 million yen. The automaker built an assembly plant in Mexico in 2014, which depressed the share of Japanese imports to the U.S.

For about 200 major Japanese companies, pretax profit will raise by 0.43% each time the yen weakens 1 against the dollar this fiscal year, Daiwa Securities estimates. But that is only about half the scale seen at the outset of the global financial crisis.

And the soft yen hurts companies heavily dependent on domestic demand and imported materials. Furniture seller Nitori makes 90% of its products overseas. That exposure leaves the company's annual profit poised to shrink by roughly 2 billion yen each time the Japanese currency depreciates by 1 per dollar.

Fellow retailers are doing whatever they can to defend against price hikes and retain customers. Ryohin Keikaku, the parent of the Muji brand, recycles cloth scraps and other byproducts from apparel manufacturing processes that otherwise would be discarded. The company is expanding the selection of lower-priced products.

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