May 10, 2022 (nytimes.com) - For years, as Japan tried to boost its chronically weak economic growth, it pursued what its central bank saw as a magic formula: stronger inflation and a weaker yen.
It didn’t quite work as intended. Inflation never met the government’s modest target, despite rock-bottom interest rates and heaps of fiscal stimulus. Workers’ wages stagnated, and growth remained anemic.
Now, Japan is suddenly getting what it wished for — just not in the way it had hoped.
While overall inflation remains moderate, food and energy costs are rising rapidly, an outgrowth not of increased demand, but of market turmoil related to the pandemic and Russia’s invasion of Ukraine. And the yen has hit a two-decade low against the dollar, a dizzying drop of more than 18 percent since September that has unnerved Japanese businesses.
The twin forces are posing yet another challenge for the world’s third-largest economy as Japan trails other major nations in emerging from the economic blow of the pandemic. The rise in prices has spooked Japanese consumers used to decades of stability, and the weak yen is starting to look as if it will depress demand at home more than stimulate it abroad.
In a previous era, when Japan was a manufacturing superpower, a weak yen would have been cause for celebration, making Japanese exports cheaper abroad, increasing the value of revenue earned overseas and attracting foreign investment.
But exporting is now less important to the overall Japanese economy, and companies — seeking to avoid trade restrictions and take advantage of cheaper labor costs — have begun to produce more of their products overseas, reducing the impact of exchange rates on their bottom line. ...continue reading
