TOKYO -- Japan is one of the few countries where a weaker currency is good for the stock market, but a closer look reveals the long-term consequences of this reliance at a time when companies need to invest abroad for growth.
Data going back to 2000 shows that for 10 out of 36 sectors in the Nikkei Stock Average, a weaker yen correlates with higher share prices. This includes industries heavy with blue chip exporters, such as automobiles and electronics, which benefit when overseas profits are converted into a weaker yen.
The same data does not show a single sector where stock prices rise as consistently when the yen appreciates.
Among the Group of 20 economies, only stocks in Japan and the U.S. show such a pattern with respect to their currencies.
In Europe, there is no clear relationship between stock prices and the euro. In places like Canada and Indonesia, a strong currency equates to a bull market, while in emerging markets in general, weak currencies weigh down on equity prices due to concerns of capital flight.
"Until the mid-1980s, a strong yen equaled high stock prices," said Yoshihiro Ito at Okasan Online Securities, who has analyzed Japanese equities for more than half a century. The data bears out this relationship during that decade.
Back then, a robust yen signaled confidence in Japan's finances, which drew international funds to its stock market. But during the 1990s, the correlation between the strong yen and a bull market died out. The 2000s saw a shift to the current pattern, a relationship that grew in strength this decade.
Japan's core consumer prices started entering deflation territory in fiscal 1998. "During the inflationary period, a strong yen lowered import prices, which factored into high stock prices, but with deflation that relationship has faded," said Eiji Kinouchi at Daiwa Securities.
A bull market encourages business managers to invest, spurring consumption. But a weak yen undermines purchasing power as well.
Under the gains-from-trade concept, defined as the net benefit derived from trading, Japan loses out when the yen depreciates. Using 2011 as the baseline, Japan's gains from trade amounted to 2.7 trillion yen ($24.7 billion) in fiscal 2018, just one-seventh as much as in fiscal 2000.
During the same period, the yen's real effective exchange rate -- a measure of its ability to buy goods and services -- fell roughly 40%.
A weak yen makes outbound acquisitions by Japanese corporations pricier. Since the yen started depreciating about three years ago, capital expenditures overseas have trended lower, according to data from the Ministry of Economy, Trade and Industry. The same pattern can be seen in the share occupied by offshore mergers and acquisitions.
The consequences of slower growth are clear. In terms of purchasing power parity, a way of comparing living standards, Japan has made less economic gains than China and the U.S. over the past two decades.
By this measure, which adjusts exchange rates to take into account local purchasing power, per capita gross domestic product grew about 70% in Japan in the 20 years to 2018, versus a nearly twofold rise in the U.S. and a more than seven-fold jump in China.
The lack of awareness about the hazards surrounding the cheap yen stems from the difficulty consumers in Japan have in perceiving the merits of a strong currency.
Imports make up only 17% of goods and services supplied domestically in 2017, the World Bank reports. The level lags behind the 28% average among Organization for Economic Cooperation and Development members.
"Companies suffer temporary pain from a strong yen, but the benefit to households is small," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "That's why the fear of a strong yen cannot be dispelled."