Tokyo: Twin risk factor plaguing Japanese economy

It is feared that the continuous rise of oil prices and the yen could hurt businesses, mainly export-oriented companies.

The processing trade is said to have supported the country's high economic growth in the past. During the high economic growth period, Japanese companies imported cheap raw materials and fuels, and then manufactured vehicles and electrical appliances and exported them at high prices.

This difference in the value of imported and exported goods generated a huge trade surplus, which became an engine for the country's rapid economic growth.

For Japan, which has few natural resources and therefore has to rely on exports, low-price imported raw materials and high-price export goods were indispensable to increasing profits.

With the country shifting away from a manufacturing-based economy to one based on information and service, the term "processing trade" is rarely heard now. But for Japanese industries, low-price imports and high-price exports remain important to the economy.

Despite sluggish domestic consumption, the economy has managed to expand because companies have performed relatively well on the strength of exports.

However, the rising oil prices and appreciation of the yen also may have a serious impact on this important factor.

In general, the rising yen has rendered export prices converted into yen cheaper and import prices lower.

With prices for oil and raw materials, including metals, soaring simultaneously, import prices will not fall even if the yen appreciates, which would create a worst-case scenario in which import prices are high and export prices are low.

The yen in Tokyo rose to 102 territory against the dollar for the first time in three years.

The price for West Texas Intermediate crude oil, the international benchmark, hit a record-high 103 dollars per barrel.

In addition to oil prices, prices for mineral products, including gold, and farm produce, such as soy beans, have soared, a testimony to high prices for all resources.

Unfortunately, the situation in which the yen appreciates and resource prices rise looks unlikely to stop anytime soon.

While price fluctuations to some extent are likely, we need to prepare for the value of the yen and resource prices to remain high over the mid- to long-term.

Depending on the circumstances, the Japanese currency and oil prices could surge even further.

Companies that close their books for the year ending in March are working on their budgets for the new business year beginning in April and their business plans.

They are facing extreme difficulties in terms of the business forecast, particularly in estimating the average exchange rate for the year, the direct costs of raw materials and fuel expenses, and the indirect costs resulting from an increase in transportation fees due to rising oil prices.

Cautious planners would set the yen value and costs, including prices for raw materials, at higher levels that would make it even more difficult for exporters to predict profitability.

In this case, export-oriented companies, which are one of the few engines propelling the economy, may be reluctant to make capital investments.

In the worst-case scenario, the economy could fall into stagflation, in which businesses deteriorate while commodity prices surge.

The government and central bank have to quickly map out measures to prevent such a scenario from becoming a reality.

To this end, the first step is to normalise Diet business as soon as possible and appoint a new Bank of Japan governor.

By Yoshimitsu Ohashi

The Yomiuri Shimbun

Publication Date: 05-03-2008