Japan's Business Elite Urges Government for Decisive Action Amid Persistent Yen Weakness

Japan - Ekhbary News Agency

Japan's Business Elite Urges Government for Decisive Action Amid Persistent Yen Weakness

In a powerful statement echoing mounting concerns across Japan's corporate landscape, a leading business executive has called upon the government to take more decisive action regarding the yen's persistent depreciation. The plea comes at a critical juncture for the world's third-largest economy, where the weak currency, while historically seen as a boon for major exporters, is now inflicting significant pain on smaller firms by driving up import costs and severely limiting their ability to raise wages, a crucial component for escaping decades of deflation and stimulating domestic demand.

The comments reflect a growing sentiment that the benefits of a weaker yen, once a cornerstone of 'Abenomics' designed to boost export competitiveness and corporate profits, are increasingly overshadowed by its detrimental effects on the domestic economy. For small and medium-sized enterprises (SMEs) — the backbone of Japan's economy, employing a vast majority of its workforce — the currency's slide has become an existential threat. These businesses are heavily reliant on imported raw materials, energy, and components. As the yen weakens against major currencies like the U.S. dollar, the cost of these essential imports skyrockets, squeezing profit margins that are often already thin. Unlike large corporations with diversified supply chains or hedging strategies, many SMEs lack the resources to absorb these rising costs or pass them entirely on to consumers in a market still sensitive to price increases.

The ripple effect is profound. With higher operational costs, SMEs find their room for maneuver significantly curtailed, particularly when it comes to wage negotiations. Prime Minister Fumio Kishida's administration has made wage growth a central pillar of its economic policy, viewing it as indispensable for fostering a virtuous cycle of consumption and sustainable inflation. However, the weak yen directly undermines this objective. Firms struggling with import bills are hesitant, or simply unable, to offer substantial pay raises, perpetuating a cycle of stagnant incomes and subdued consumer spending. This creates a stark dichotomy: while major export-oriented companies like Toyota and Sony might report record profits partly due to advantageous exchange rates, the domestic economy, particularly the service sector and smaller manufacturers, grapples with inflationary pressures and constrained growth.

The current predicament is deeply intertwined with the Bank of Japan's (BoJ) steadfast commitment to its ultra-loose monetary policy, including negative interest rates and yield curve control (YCC). While central banks globally, led by the U.S. Federal Reserve, have aggressively hiked interest rates to combat inflation, the BoJ has maintained its accommodative stance, arguing that Japan's inflation is primarily cost-push (driven by imports) rather than demand-pull, and that sustainable wage growth is yet to be firmly established. This widening interest rate differential between Japan and other major economies has made the yen less attractive to investors, leading to its sustained depreciation.

The government's options to address the yen's weakness are complex and fraught with potential trade-offs. One immediate, albeit temporary, measure is direct currency intervention, where the Ministry of Finance (MoF) instructs the BoJ to sell dollars and buy yen. Japan intervened in the currency market in late 2022, spending tens of billions of dollars to prop up the yen. While such interventions can provide short-term relief and signal governmental resolve, their long-term effectiveness is often limited without a fundamental shift in monetary policy or global economic conditions. Unilateral intervention can also be costly and may not always succeed against overwhelming market forces, especially if interest rate differentials remain wide.

Another, more impactful, but riskier path would involve a pivot in the BoJ's monetary policy. This could entail phasing out YCC, raising interest rates, or abandoning negative rates altogether. Such a move would strengthen the yen by making yen-denominated assets more appealing. However, it carries significant risks: it could trigger a recession by increasing borrowing costs for businesses and households, potentially destabilizing the bond market, and unwinding years of efforts to achieve the elusive 2% inflation target. The BoJ has consistently stressed the need for sustainable inflation, driven by wage growth, before considering tightening.

Beyond monetary policy, fiscal measures could offer some relief. The government could implement targeted subsidies for SMEs struggling with import costs, offer tax incentives for wage increases, or provide energy cost relief. These measures, however, would add to Japan's already substantial public debt and might be seen as treating symptoms rather than the root cause of the yen's weakness. Structural reforms aimed at boosting productivity, fostering innovation, and enhancing domestic demand could offer long-term solutions, but these typically take years to yield results.

The political implications of the weak yen are also becoming increasingly salient. The Kishida administration faces growing public dissatisfaction as the cost of living rises due to imported inflation, eroding purchasing power. While large corporations benefit, the average consumer feels the pinch at the grocery store and the gas pump. This disparity fuels a narrative that the government prioritizes big business over ordinary citizens, potentially impacting approval ratings and future electoral prospects. The pressure from business leaders, therefore, serves as a crucial signal to the political establishment that the economic pain is widespread and requires urgent attention.

Economists are divided on the optimal path forward. Some argue that the BoJ must eventually normalize its policy, even at the risk of short-term economic turbulence, to restore the yen's stability and prevent further erosion of real incomes. Others contend that premature tightening could derail Japan's fragile recovery from the pandemic and its long battle against deflation. They suggest that fiscal support and structural reforms are better suited to address the current challenges while the BoJ maintains its accommodative stance until demand-pull inflation truly takes hold.

Looking ahead, the trajectory of the yen will largely depend on a confluence of factors: the actions of the BoJ and MoF, the global interest rate environment (particularly the U.S. Federal Reserve's policy), and geopolitical developments. The call from the business community underscores the urgency for a comprehensive and coordinated strategy that addresses both the immediate challenges faced by SMEs and the broader imperative of fostering sustainable economic growth and wage increases in Japan. Without decisive action, the weak yen risks not only stifling smaller firms but also undermining the very foundations of Japan's economic revitalization efforts.

Ekhbary News Agency