Japanese Auto Manufacturers Demand Weaker Yen

By Chris Haak

The Japanese Automobile Manufacturer’s Association (JAMA) and the Confederation of Japan Automobile Workers’ Unions (CJAWU) released a joint statement yesterday demanding that the Japanese government take immediate steps to reduce the strength of the yen.  The current exchange rate between the yen and dollar is about ¥80 per $1 USD.  Three years ago, it was ¥110 per $1 USD, so it’s gained 27 percent on the dollar in a fairly short timeframe.  (A lower yen-per-dollar number means a stronger yen.)

Japan’s government has famously intervened throughout history to keep the yen artificially weak, which greatly helped the small country’s giant export-driven economy prosper globally.  And yet economic uncertainty in the US, plus soverign-debt problems in Europe, with speculators expecting that earthquake/tsunami recovery efforts will makethe yen’s relative strength become even more pronounced.  The statement said, in its entirety:

Current foreign exchange rate levels represent, for the yen, an appreciation that not only far surpasses all prior projections by Japanese automakers, but also totally fails to reflect Japan’s economic fundamentals.

Over the decades, the Japanese automobile industry has carried out a steady series of cost-cutting and other measures necessary to maintain its international competitiveness.  The yen’s present exchange rate level, however, clearly exceeds the limits of such efforts.  The continuation of this trend seriously threatens the ability to maintain the foundations supporting the manufacturing craftsmanship that has long been the basis of Japan’s competitive edge.  There are also fears that these currency market conditions will have a profoundly adverse impact on employment throughout Japan’s motor industry, including the parts supply and other vital sectors.

Having been heavily affected by the devastating March 11 earthquake and tsunami, automobile production in Japan is at last moving towards recovery.  The yen’s excessive appreciation risks gravely hampering this nascent recovery and, in doing so, imperiling the resurgence of Japan’s weakened economy.

In view of these realities, JAMA and the CJAWU strongly demand that the Japanese government take swift and effective action aimed at reducing the yen’s current strength.

The second paragraph is particularly interesting.  On one hand, the JAMA says that manufacturing craftsmanship has long been the basis of Japan’s competitive edge.  But if manufacturing craftsmanship is the basis of the competitive edge, why is flooding world currency markets with additional yen, therefore depressing its value, required in order for Japan, Inc. to maintain its competitive edge?  Either Japan gets its edge from craftsmanship, or it gets its edge from currency manipulation intervention.  They can’t have it both ways.

So, if Japanese companies find it uncompetitive to build vehicles in Japan, could the likes of Honda, Toyota, and Nissan find themselves at the same crossroads that Japanese electronics giants such as Sony and Panasonic did decades ago, when it was no longer economically viable to produce most of their goods locally?  It’s quite likely.

If JAMA’s wishes do not come true, the winners will be the US, Korea, and China.  All three countries have skilled workers and – thanks in part to the yen’s appreciation – a lower cost base than Japanese domestic production has.  Expect further expansion of joint ventures between the Japanese giants and Chinese automakers, and expect to see expansion of transplant production in the US.

Japan’s automakers will no doubt adapt to whatever reality they are facing vis a vis exchange rates, but it seems entirely possible that the yen’s value will mark the beginning of the end of Japanese domestic auto production.  At the very least, it will mean a dramtic shift in the coming years out of the land of the rising sun.