Abenomics: Weak Yen Takes Toll on Small Japanese Companies

I have recently posted on how the weak yen has wreaked havoc on profitability of many corporations, now we see evidence of the discriminatory effect from the weak yen mostly on small Japanese companies.

From the Wall Street Journal Real Times Economic Blog

While the total number of corporate bankruptcies hit a 24-year low for the six months to September, suggesting corporate Japan is doing well, in part helped by public works spending, a closer look at the data shows that the number of corporate bankruptcies caused by factors related to the yen’s weakness is rapidly rising.

Bankrupt firms citing the weaker yen surged to 214 during the first nine months of the year, compared with just 89 during the corresponding period last year, data released Wednesday by Tokyo Shoko Research Ltd. showed. Only the sales slump following April’s increase in the sales tax was cited by more firms as the main factor behind their bankruptcies.

The failed businesses, many of them small, were struck by the higher costs of imported materials such as fuel, minerals and food as the exchange rate shifted from less than ¥80 per dollar two years ago to as high as ¥110 in recent days. Hit hardest was the transportation industry, including trucking companies, which saw 81 companies go bankrupt. The number of insolvencies totaled 44 in manufacturing, 41 in wholesale and 19 in services, the research company said.

Understand that a weak yen policy (as well as other forms of interventions) redistributes resources politically from one group at the expense of the others. 

For instance, a weak yen policy has been partly designed to subsidize foreign exchange earners such as exporters compared to the rest. I say partly because there are other motives, viz inflate away debt or generate price inflation or subsidize government actions.

In the context of exports, now if we look at Japan’s merchandise trade as % to GDP, which is at 28.4% as of 2012 based on World Bank data, assuming that exports and imports are evenly distributed (even when they are not as Japan trade balance has been in a deficit that got worsened under Abenomics), this means that a weak yen policy supports only 14.2% (28.4/2) of the statistical GDP. As a caveat, this back of the envelop estimates assumes evenly distributed gains to exporters when they are not. [Exports have actually hardly gained under Abenomics] Also this looks merely at statistical numbers without considering the real economic transmission mechanism of a weak yen policy.

Yet because of natural limits in the Japanese economy, say how inflation changes the patterns of domestic consumer spending by putting a kibosh on discretionary spending, the effect would be to put pressure on corporate profits as input costs rise while firms have not been able to pass the costs to consumers as previously predicted:

In short, corporations appear to be very hesitant to raise prices perhaps in fear of demand slowdown. Thereby this means a squeeze in corporate profits. Abenomics has only worsened such existing conditions.

Yet the most vulnerable group to inflationism have been no less than small businesses. 

So while the “total number of corporate bankruptcies hit a 24-year low…in part helped by public works spending” the surge in “bankrupt firms citing the weaker yen to 214..compared with just 89 during the corresponding period last year” or signifying 140% jump, it has been the small businesses catering to domestic markets that has mostly been hit. 

Further note that so-called improvements in corporate bankruptcies has been due to “public works spending” which means many of the mainstream corporations have been benefiting not from organic economic demand but from political redistribution of resources.

As one would note Abenomics weak yen policy has about rechanneling of resources to favored interest groups or crony capitalism.

Yet the massive distortions from government interventions as I previously noted would only disrupt the economy: 

It’s a wonder how the Japanese economy can function normally when the government destabilizes money and consequently the pricing system, and equally undermines the economic calculation or the business climate with massive interventions such as 60% increase in sales tax from 5-8% (yes the government plans to double this by the end of the year to 10%[21]), and never ending fiscal stimulus which again will extrapolate to higher taxes.

It's a wonder how the Japanese economy can ever recover when small and medium scale businesses, whom have been the main victims of Abenomics, have been the heart and blood of the Japanese economy. As the Economist noted in 2010: (bold mine) More than 99% of all businesses in Japan are small or medium-sized enterprises(SMEs); they also employ a majority of the working population and account for a large proportion of economic output. While most of these companies are not as well known as Japan’s giants, they form the backbone of the service sector and are a crucial part of the manufacturing and export supply chain. 

Notice too why exports haven't picked up? 

Also given Japan highly fragile fiscal conditions, all these interventions implies that it’s a system that has been thriving on borrowed time and is not bound to last. 

Booming Japanese stocks, one of the major beneficiaries of political redistribution and direct interventions in particular BoJ's record buying of Japanese stocks, will eventually face economic reality.