1 of 3 | Foreign visitors dine at an outdoor izakaya in Tokyo’s Shimbashi district. The weak yen has made Japan cheaper for tourists while raising import costs for Japanese households. Photo by Asia Today
July 3 (Asia Today) — Japan has become an increasingly affordable destination for foreign visitors, but the weaker yen has sharply reduced the ability of Japanese households and businesses to buy goods and services from abroad.
The yen’s real effective exchange rate, a broad measure of its inflation-adjusted value against the currencies of Japan’s trading partners, fell to 65.93 in May, The Yomiuri Shimbun reported Friday.
That was less than half the 141.77 recorded in December 1986, when the nominal dollar-yen exchange rate was near levels recently seen in foreign-exchange markets.
The comparison indicates that even when the dollar-yen rate appears similar to its level 40 years ago, the yen’s actual external purchasing power is substantially weaker.
The real effective exchange rate is not based on the yen’s value against one currency, such as the U.S. dollar.
The index combines exchange rates with multiple trading partners, gives each currency a weight based largely on trade and adjusts for differences in inflation. The Bank for International Settlements and the Bank of Japan publish the data with 2020 set at 100.
A lower figure indicates that the yen has weakened after inflation and trade relationships are taken into account.
The Yomiuri illustrated the difference using the price of a pizza.
Even when the nominal exchange rate is similar to the rate in the 1980s, prices in the United States have risen much more than prices in Japan over the past four decades. A Japanese consumer carrying the same amount of yen can therefore buy far less in the United States today.
The distinction helps explain why the current period of yen weakness differs from the weak-yen environment of the 1980s.
Japan’s long period of low inflation contributed to the decline.
After the collapse of the country’s asset-price bubble, consumer prices and wages remained stagnant for much of the period beginning in the 1990s. Prices continued to increase in the United States, Europe and many other economies.
The Bank of Japan’s large-scale monetary easing, introduced in 2013 to end deflation, also placed downward pressure on the yen’s nominal value.
The combination of low domestic inflation and nominal depreciation accelerated the decline in the currency’s real effective value.
Cheap Japan, expensive world
The weak yen has made hotels, restaurants, clothing and consumer products in Japan appear less expensive to South Korean travelers and other foreign visitors.
For South Koreans, the effects of yen depreciation are often most visible through lower travel costs in Tokyo, Osaka and other Japanese destinations.
Foreign visitors’ spending has supported department stores, convenience stores, drugstores, restaurants and regional tourism businesses across Japan.
The same trend can create competition for South Korean tourism destinations and retailers as consumers choose between spending money domestically and traveling to Japan.
The weaker yen has the opposite effect on Japanese households.
Japan imports much of its energy, food and industrial raw materials. A weaker currency raises the yen-denominated cost of those imports, increasing pressure on household budgets and companies that cannot fully pass their higher costs on to customers.
The prolonged decline of the currency has become a policy concern as Japanese consumers face higher prices for fuel, food and other imported goods.
Japanese companies experience both advantages and disadvantages from the exchange rate.
Manufacturers must pay more for imported energy, raw materials and components. Exporters, however, can convert overseas earnings into more yen and may be able to offer more competitive prices abroad.
The price advantage can affect South Korean companies competing with Japanese manufacturers in automobiles, machinery, materials and components.
South Korean exporters doing business in Japan may face a different challenge.
As the purchasing power of Japanese consumers and businesses declines, Japanese buyers may become more sensitive to the prices of imported South Korean products and services.
Japanese importers could seek lower contract prices while consumers turn toward less expensive alternatives.
The Japanese market may therefore remain large in nominal terms while becoming increasingly price-sensitive for foreign suppliers.
The real effective exchange rate does not directly measure every household’s standard of living. It does, however, show how the yen’s value has changed after accounting for trade patterns and differences in inflation.
Its decline suggests that the effects of yen weakness extend beyond making Japan a less expensive place for tourists.
The trend is changing Japanese households’ consumption power, companies’ purchasing structures and the competitive environment facing businesses in South Korea and Japan.
For South Korea, the weak yen offers the immediate benefit of less expensive travel to Japan.
It can also contribute to an outflow of domestic consumer spending, stronger price competition from Japanese exporters and greater resistance to foreign product prices inside Japan.
Japan has become cheaper for South Korean visitors, but much of the world has become more expensive for Japanese consumers.
That widening gap is likely to remain an important factor shaping tourism, consumption and export competition between the two countries.
— Reported by Asia Today; translated by UPI
© Asia Today. Unauthorized reproduction or redistribution prohibited.
Original Korean report: https://www.asiatoday.co.kr/kn/view.php?key=20260703010001239
