Abenomics: Weak Yen Not Equal to Strong Exports

In the view of the consensus, currency devaluation serves as a key policy to promote economic growth via implicit subsidies to the export industry through a weaker currency.

Yet Japan’s Abenomics appears to be falsifying such populist snake oil therapy.

From the Wall Street Journal Real Times Economics Blog. (bold mine)

Despite the generally held view that the weak yen can quickly boost Japanese exports by making them more price-competitive in the global markets, many Japanese companies cut their export prices gradually.

They typically employ what is known as “pricing-to-market,” where they basically set the prices of their exports to match prevailing levels in their target markets, and adjust prices so that they are in line with exchange rates at a measured pace.

“Just because the yen falls that doesn’t mean Japanese companies will rapidly slash their prices” if there is no change in internationally accepted price levels, said Takeshi Minami, chief economist at Norinchukin Research Institute. “If they aggressively cut prices, they could be accused of dumping.”

Since the ultimate goal of most companies is to make money rather than boost the amount of goods sold, other economists say that if consumers overseas are willing to buy Japanese products at current prices, firms will be most willing to oblige.

Concern that yen will rebound is another reason why Japanese firms are cautious about lowering export prices, people familiar with the BOJ’s thinking have said. While prices at the same high levels may help to maintain the status quo even if sales suffer, consumers tend to take a more negative view of sudden price increases.

Looking at the four times there was a major upward movement in the dollar against the yen between 1988 and 2007, the BOJ export-price index initially fell by just 1.8% on average.

The “ultimate goal of most companies is to make money rather than boost the amount of goods sold” is indeed why people engage in trade. It has been rare to see articles that gives a balance account of events.

From another Wall Street Journal Real Time Economics Blog (bold mine)

But Japan’s exports declined 2.4% in the July-September period from the previous quarter, according to preliminary gross domestic product data released Thursday.

Officials say, however, that while the weak yen did help exports, economic conditions and policy decisions in destination countries can trump the exchange-rate factor.

If such factors are one-off developments, that could mean there’s still room for export optimism.

Take Thailand, for example. Japanese exports there had been robust until recently due to ongoing reconstruction activities after the devastating floods in 2011 and generous government incentives for new car purchases.

But with the program having expired in December, orders dried up after a backlog of orders was met and imports started to go down.

“Once the Thai government’s car-buying incentives ended, the market quickly lost their impact on overall demand,” said Nobuyori Kodaira, Executive Vice President at Toyota Motor Corp.

Indonesia is another case. The country cut fuel subsidies in June in a bid to reduce its fiscal deficit. That has led to a drop in demand for Japanese cars, and materials for car production, such as steel and machine tools.

In the six months ended September, auto shipments to the rest of Asia dropped 10.4% from the same period a year earlier, according to Japan Automobile Manufacturers Association data.

In both cases, the decline in exports was a result of policy changes by the respective governments, much more than any financial turbulence caused by expectations for a U.S. monetary policy change, a senior Japanese official said.

Canon Inc. last month lowered its net profit outlook for the full business year through December to ¥240 billion from ¥260 billion. “China and other Asian nations accounted for one third” of the downward revision, said Canon Chief Financial Officer Toshizo Tanaka.

Japanese export volumes fell to the U.S. also, but for a different reason. As demand for Japanese cars picked up, auto makers began ramping up local production rather than boosting exports from Japan.

All these developments are likely to be one-off events, however.

The lesson from the above articles has been that trade represents a complex ‘subjective’ dynamic between contracting parties, which have not only been dependent on prices but to many manifold factors, some of which has been cited above. 

Yet the consequences from the combination of these factors are hardly knowable for policymakers to justify interventions. So the simplistic solutions end up backfiring.

Moreover since the initial spike of exports from Abenomics, Japan’s exports has hardly grown.

Importantly the deterioration of the Japan’s trade balance relative to pre-Abenomics (2012), shows how imports have been growing faster than exports. This reveals, so far, that falling exports hasn’t been a "one time event".

And aside from granting political privileges to select or favored members of society at the expense of the rest and inflating debt away via indirect gradualist default (where foreigners own 8.4% JGBs as of June 2013), another reason for devaluation has been to promote nationalism 

Writes the great Austrian economist Ludwig von Mises:

Devaluation of a country's currency has now become a regular means of restrict­ing imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations' currency systems.

Japan’s growing nationalism can be seen even outside the economic context. Geopolitical tensions such as territorial dispute with China over the Senkaku Island has prompted Japan’s government to increase defense spending and a adapt a “new defense equipment production strategy” with allies.

So aside from the failure to attain mercantilist goal of "favorable balance of trade", devaluation, which fosters nationalism, only increases the risks of military conflicts or war.