Good for some, bad for others
The euro’s fall has sent stock markets tumbling. On May 21, the Nikkei closed on a five month low at 9,800 yen; for a moment, it plunged to 9,696.63 yen. Europe’s debt problems are causing a host of global economic concerns, including in Japan.
For Japanese companies reliant on exports to the Eurozone, the weakening euro is a bitter pill to swallow. A stronger yen against the euro increases the price of products manufactured in Japan and sold in Europe. Currency conversion also diminishes profits.
The Japanese electronic and auto industries are particularly affected, having just emerged from a two-year slump in sales. Sony, who generate some 23% of sales from Europe, are watching operating profits fall by 7m yen every time the euro’s value decreases by 1 yen, says the Wall Street Journal. Mazda and Sharp are also affected.
The flight of investors to the safe-haven yen is also affecting exports, a trend that has picked up because of political tensions in the Korean peninsula. The yen is artificially high.
But there are two sides to every story, and for some, the falling euro is a good thing. Eurozone exporters are watching intently: a 10% decline in the euro equates to a 3% gain in profit for them, estimates Stefan Hofrichter, chief economist at Allianz Global Investor’s RCM unit in Frankfurt, quoted in Bloomberg Businessweek. For Airbus, every 10 cent drop in the euro’s value is boosting operating profits by 1bn euros. Luxury group LVMH also stands to gain. High-end luxury goods produced in fashion-centres France and Italy are exported to emerging economies, Japan and the US.
And even in Japan, there are some economists who are not as worried. Quoted in the Japan Times, professor Hiomasa Kubo at Kobe University said, “Even if exports (to EU nations) decline, that won’t have a big negative impact on the Japanese economy as a whole. I am more fearful of China stumbling.” He says the troubles of Europe are highly unlikely to affect China.
Morgan Stanley MUFG estimates that, including indirect exports, the European market makes up 20% of Japanese exports. With recovery riding on exporters, it increasingly looks like Japan’s recent growth could be dampened.