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Japan Inc.’s appreciation of the yen’s depreciation

Japan's Prime Minister Shinzo Abe attends a lower house plenary session at the parliament in Tokyo, Feb. 5, 2013.

ISSEI KATO/REUTERS

Japan's major exporters are quickly reaping the benefits of a weaker yen, upgrading profit projections and inspiring confidence in the ability of a newly elected government and a more dovish central bank to steer the country out of two decades of economic malaise.

Toyota Motor Corp. underscored the new air of optimism on Tuesday when the auto giant hiked its profit forecast for the current fiscal year to a five-year peak. This followed similar upward revisions last week by Nintendo Co. and Japan Tobacco Inc. A weaker currency, coupled with a recent wave of cost-cutting in autos, electronics and other key sectors, signals a surge in profitability for Japan Inc.

In the markets, it's being called "Abenomics," named for the new Prime Minister, Shinzo Abe, who has taken his overwhelming victory in December as a green light to pursue an economic revival strategy centred on massive infrastructure spending, more debt financing and monetary policies designed to depreciate the currency and put some inflation back into the deflation-prone economy.

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So far, the markets seem persuaded he will succeed in at least one part of his plan – bringing down the yen's value.

To that end, Mr. Abe has ratcheted up pressure on the famously conservative Bank of Japan to do its part by doubling its former 1-per-cent official inflation target and cranking up the printing presses.

The yen slid Tuesday after central bank Governor Masaaki Shirakawa announced that he is leaving his post March 19, three weeks before his term expires. This coincides with the departure at the same time of his two deputy governors.

This clearing of the decks is the main reason for the yen's decline, said chief currency strategist Camilla Sutton of Scotia Capital. Or, as she phrased it, the "plot." The Governor's decision underlines that "there is going to be a sea change at the Bank of Japan," she said.

"Arguably, in going a few weeks earlier, he streamlines the handover," said Mark Williams, chief Asia economist with Capital Economics in London. "The bigger question is whether or not the opposition will allow it to go smoothly. Japan has a history of quite messy transitions at the Bank of Japan."

The currency story also features continuing subplots, including the dispute with China over control of a handful of tiny islands in the East China Sea, which escalated again on Tuesday. The trigger was Tokyo's warning to Beijing stemming from a recent incident when a Chinese military ship briefly trained radar used to direct weapons on a Japanese naval vessel near the islands.

But these are temporary blips. And questions remain about whether Japan can pursue a weak-currency policy for a lengthy period without triggering an inevitable response from such key competitors as South Korea, whose own exporters have been hit by a strong won and its 27-per-cent rise against the yen in the past 13 months.

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French President François Hollande fired his own shot Tuesday, telling the European Parliament that the euro zone needs "a foreign-exchange policy. Otherwise, it has an exchange rate imposed on it that does not correspond to the real state of the economy."

Japanese executives, though, would rather talk about currency gains than currency wars.

"Ever since the new government took control, it feels as though Japan is filled with the spirit for economic revival," Toyota senior managing officer Takahiko Ijichi told reporters.

Japanese corporate profits are likely to soar by close to 40 per cent in the next fiscal year, said economist Andrew Smithers, chairman of London-based Smithers & Co. Ltd., who keeps close tabs on Japanese developments.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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