Positive Effects of High Yen on Japan – Theory and Reality

Osaka – Tuesday, November 23, 2010




Yen had been hovering at the level of 80-82 yen per USD for quite a while, has depreciated a little hovering 83-83.5 yen per USD since the recent G20 held in Korea, but is still a serious issue in Japan. Taking this opportunity, the author discussed possible negatives effects of high yen on Japan in the previous article

Negative Effects of High Yen on Japan – The Reality



In this article, she would like to discuss on the positive ones in theory and the reality.



The conclusion is that there seem to be more negative effectives than the positive ones. Also, the possible positive effects have not all resulted in positive effects as expected/in theory because of the characteristics of the positive effects and other negative factors such as worldwide abnormal weather. As a result, the limited positive effects have been traded off with such negative factors. Therefore in total, negative effects exceed positive effects, and thus the result is ongoing sluggish economy.



1. Decrease in price of imported products






1) Theory



In theory, price of imported products should drop unless the wholesalers and/or retailers increase their margin. This is why in high yen times, there are usually bargains reducing benefits of high yen by retailers, with the objective of stimulating consumer spending leading to boost in their sales and growth in their businesses.



Also, since Japan depends most of its agricultural products and other household goods on import, high yen should mean decrease in total household expense.



2) Reality






(1) As theory



Recently in a TV programme, bargains reducing high yen were featured. A case of Nitori Co. Ltd, a company that does business in student desks, Japanese traditional school bags etc. imports 90% or more of their products from overseas and therefore additional 900 million yen profit is generated for every appreciated 1 yen per USD. Taking the opportunity of the recent high yen, Nitori has been slashing the retail price of their products by 10-30% to boost their sales. Moreover, according to their TVCF that went on the air this morning they have been additionally slashing their prices since October 30 by 15-40% to further boost their business, together with launching new products for Christmas business.



Another case featured was of a department store. Most of their products are imported and they also were trying to boost their sales by bargains reducing benefits of high yen.



(2) Not as theory



The overall household spending does not seem to have decreased and most household do not truly realize the benefit of high yen. Possible reasons for this are the following:-



a) Imported products with lower price in high yen targets limited customer segment



Most imported products whose price has dropped are of luxury products (e.g. branded products such as of Chanel, Louis Vuitton, Tiffany) and products that are not of daily necessities like that of Nitori.



This means it is mostly the rich people who can afford luxury products that benefit from high yen. Other possible people who benefit from high yen are those who need to buy products of Nitori business because their children have reached such an age, and who can afford to additionally buy non-daily necessities. Such people are minority of the total Japanese citizens. For this reason, bargains reducing benefits of high yen on total consumer spending is limited.



b) Prices of agricultural products has not dropped under high yen



Prices of imported daily necessities such as agricultural products have not dropped despite the high yen. This is because of poor harvesting due to abnormal climate worldwide, such as poor harvesting of wheat in Russia, vegetables in Australia and the U.S. Thus, decrease in yield of such products has traded off the benefits of high yen.



2. Boost in tourism business (tourists from Japan to overseas)



(1) Theory



In theory, more Japanese people would travel abroad leveraging the benefits of high yen, meaning boost in overseas tourism business. This is because under high yen, with the same amount of money in yen, people can buy more products abroad so high yen would be an incentive for them to travel abroad, buy products and bring them back to Japan and/or spend money abroad in other ways such as enjoying services.



(2) Reality



Tourism industry revenue has not increased as much as expected. This can be due to the fact that with ongoing sluggish economy and decrease in average income, it is only the limited rich people who can truly enjoy the benefit of high hen in tourism, and the majority of the Japanese cannot afford to travel abroad as in strong economy.