After fall, Japan yen in sweet spot for economy, but U.S. watching

Sun Jan 26, 2014 2:04pm EST
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By William Mallard

TOKYO (Reuters) - After falling by almost a fifth since Japanese Prime Minister Shinzo Abe came to power just over a year ago, the yen is in a sweetspot for the economy.

Companies have roared back with bumper profits as the currency's slide to five-year lows made exports more competitive and while import prices, notably for fuel, have climbed, importers are benefiting too.

But should the yen keep falling, the drawbacks of higher import prices and possible anger from Washington and other trading powers could start to outweigh the benefits of a weaker currency. Those benefits start shifting to drawbacks if the yen slips to 120-130 per dollar from its current Goldilocks' range of 100-110.

The yen may weaken further as the U.S. Federal Reserve slowly tightens its dollar-liquidity spigot while expectations grow that the Bank of Japan will increase its own flood of money into the economy to offset a sales-tax increase in just over two months, say Japanese executives, policymakers and investors.

"I don't think many people in Japan want a yen decline to around 120 or 130 to the dollar," said BOJ economist Nobuyasu Atago, who is now on a stint at the Japan Center for Economic Research. "Many companies have already moved production overseas and may also become hesitant to boost exports for political considerations."

Indeed, Japanese firms are not clamoring for a further drop and they believe the yen's fall has largely run its course, a new Reuters poll shows. For years, a strong yen had sapped Japan's export competitiveness and worsened its deflation.

For the past two months, the dollar has traded between 100 yen and its high at the start of the year of 105.44. That is the peak for the U.S. currency since October 2008 - the early days of the global financial crisis, when investors began fleeing risk for the perceived safe haven of the yen.

It ended Friday trading at 102.28, having slipped in recent days as stock markets fell.   Continued...

A man holds Japanese 10,000 Yen ($121) bank notes in front of a bank in Tokyo November 22, 2012. REUTERS/Kim Kyung-Hoon