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Since
taking office on Dec. 26, 2012, Shinzo Abe has taken extreme action by
forcing the Bank of Japan (BOJ) into more aggressive monetary easing in
order to stimulate Japan’s economic growth.
This easing is being carried out through an asset-purchasing scheme and yen
devaluation. In 2012, the BOJ had already expanded its balance sheet to
¥101 trillion (US$ 1.09 trillion) in order to weaken the yen.
In January, the BOJ announced a more aggressive approach through the “price
stability target” and the “open-ended asset purchasing method” that will
become effective in 2014. The former will be pursued by doubling the
inflation target to 2 percent, whereas the latter will be carried out
through unlimited asset purchasing. In order to accommodate this monetary easing,
the BOJ has prepared monthly asset purchases of ¥13 trillion.
In Japan, this announcement has caused positive sentiment on the Nikkei. It
hit a 33-month closing high on Friday, Feb. 1. The BOJ’s commitment to
pursuing more monetary easing also weakened the yen further. On the same
day, the yen also hit a 32-month low of 92.2 against the US dollar.
Following this sharp depreciation, some economists are worried that this
action may lead to a currency war. Moreover, some countries such as
Australia, the United States and Germany are concerned that the weaker yen
may have a negative impact on their economies.
Nevertheless, for the rest of Asia, particularly East Asian economies, yen
depreciation does not necessarily lead to bad things.
In fact, the manufacturing sector in the region may benefit from a cheaper
yen since most Southeast Asian economies such as Thailand, Malaysia and
Indonesia import manufacturing parts and components from Japan. These parts
are then assembled and sold in the local market.
As a consequence, a weaker yen causes the import price to drop and, thus,
local companies will be able to enjoy higher profit margins due to lower
production costs and, to some extent, less severe foreign exchange losses
from trading with Japanese companies.
In the recent years, the strengthening yen, which led to higher production
costs, adversely affected the manufacturing sector in Indonesia,
particularly the automotive industry. Therefore, the change in direction of
the yen should be considered as momentum to enhance manufacturing in
Indonesia since it provides an incentive to produce more goods while
production costs reduce.
Despite these benefits, a weakening yen may also have some negative
implications. One possible short-term adverse impact of a weaker yen is
Japan’s declining purchasing power in Asia.
Currently, Japan is a major investor in the region, it invests heavily in
its Asian neighbors. In Indonesia, for instance, Japan is one of the
biggest investors and only second to Singapore in 2012. A report by CIMB
Research shows that Japan’s foreign direct investment (FDI) accounts for
around 11 percent of Indonesia’s total inward FDI.
Hence, as the yen depreciates, Japan’s investment in Indonesia and other
Asian countries will slow down in the short-run due to more expensive
outward capital investment. Considering Japan’s big FDI influence, this
slower investment from Japan, to some extent, will hinder investment growth
in the region.
Another possible negative impact is the expected decline in exports from
Asian countries to Japan. As the yen gets weaker, Japan’s consumers will
buy fewer foreign goods as they become more expensive. Thus, Japan will
import less from other countries, including Indonesia.
In this regard, data from the CEIC suggest that Indonesia’s export share to
Japan is around 16 percent of its total exports. Thus, Indonesia’s reliance
on exports to the Japanese market may result in a weakened trade balance.
Meanwhile, Indonesia has been experiencing a trade deficit since the fourth
quarter of 2012 and, based on the government forecasts, will see another
deficit in 2013.
As a consequence, Indonesia’s government has to be careful in order to
prevent its trade balance deteriorating further, following the weaker yen.
In short, however, the depreciating yen will have a positive impact on
Asian economies, including Indonesia. In particular, this will bring
benefits to the manufacturing sector that imports parts from Japan.
Nevertheless, Indonesia’s government and central bank has to monitor its
impacts closely since it may also have negative results. ●
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