SETSUO OTSUKA, Nikkei financial policy and markets editor, and KOSUKE IGUCHI, Nikkei staff writer
TOKYO — When the yen weakens, the stock market rallies. This long-held rule of thumb no longer applies as Japan is not the export powerhouse it once was.
The Nikkei Stock Average recorded its third-steepest drop this year on Monday even as the yen sank to a 24-year low against the dollar, underscoring the shrinking role of exports to Japan’s economy.
The Japanese currency also depreciated significantly in 1998, 2005 and 2013, and shares rose during the latter two years on expectations that the trend would benefit exporters. Structural shifts in trade and labor markets since then have put Japan’s economy in a position where it cannot reap these benefits as easily.
In 2005, the yen softened as much as 15% as strong global economic growth, including the U.S. housing bubble, encouraged Japanese investors to put money overseas, leading to yen selling. The Nikkei average jumped roughly 40% that year. In 2013, when the Bank of Japan launched its “new dimension” of monetary easing, the currency weakened 20% while the benchmark index soared 60%.
The Nikkei average slumped nearly 10% in 1998, but this stemmed from a deep financial crisis and credit crunch that drove the yen down as far as 147 to the dollar, even with government intervention.
“The yen’s weakness alongside high crude oil prices is a major factor” that separates the current situation from earlier periods of depreciation, said Taro Saito, executive research fellow at the NLI Research Institute. West Texas Intermediate futures in 2005 traded around $40 to $60 a barrel — about half the current level — and Japan logged an 8.7 trillion yen ($65 billion at current rates) trade surplus that year.
On that point, 2013 was closer to the current situation. Rising crude oil imports after the March 2011 Fukushima Daiichi disaster, along with oil prices hovering around $110 a barrel, combined to lead to persistent trade deficits. But even then, expectations that a weaker yen would bolster imports and stimulate the economy buoyed share prices.
Unlike in 1998, the current yen selling is not being driven by fear for the stability of Japan’s financial system. Instead, it reflects a sense that the country has lost much of the industrial competitiveness that enabled it to leverage a weaker yen effectively.
Japan’s position in global trade now is very different than it was in 1998, or even in 2013, with more production moving abroad in the intervening years.
Japanese manufacturers handled 22% of their production overseas in fiscal 2020, up from 10% in fiscal 1998, according to the Cabinet Office. The country exported over 700 billion yen more in computers and peripherals than it exported in 1998, but the gap topped 2 trillion yen in favor of imports last year.
The country’s share of global exports dwindled from 7% in 1998 to 3.4% in 2021, according to United Nations data. China’s swelled from 3.3% to 15.1% over the same period with its rise as the “world’s factory,” while the U.S. and Germany have lost less ground, coming in around 7% to 8%.
And the high-value-added products that are still made in Japan, such as autos, “don’t see their dollar-based sales prices decline even when the yen is weak, so export volume doesn’t increase,” said Naohiko Baba, chief Japan economist at Goldman Sachs.
Investors have seen over the past several years that a softer yen no longer translates into more exports, and the impact on share prices has changed accordingly.
Japan’s labor shortage makes matters even harder for manufacturers. The country now has 1.27 jobs per applicant, compared with less than 1 in 2005 and 2013, indicating a tighter market.
“Even if [companies] want to ramp up domestic production in response to the weaker yen, it’s gotten harder to find people to work at their factories,” said Shunsuke Kobayashi at Mizuho Securities.
Manufacturers have been slow to adopt productivity-boosting technology that could compensate for a lack of workers. Japan’s capital-to-labor ratio — a measure of investment compared with labor input — has gradually declined from its 2009 peak, while both the U.S. and the Eurozone have seen substantial growth since 1998, according to European Commission data.
Meanwhile, Japan has been importing more tech products. Japanese consumers often opt for iPhones over cheaper models from domestic competitors, for example, even when a softening yen drives up the price of Apple handsets.
Increased imports of products like smartphones and semiconductors, and exports that no longer respond to currency depreciation, leave Japan more prone to deepening trade deficits.
The push to rework international supply chains in the wake of the pandemic and Russia’s invasion of Ukraine could offer manufacturers an opportunity to change course. As a widening gap in interest rates between Japan and other major economies draws money to other markets, the yen may not rebound significantly anytime soon.