TOKYO – A steady decline in the yen is proving a godsend for exporters such as Toyota and has won solid support from Japan's main trading partners, who are betting the impact on their own currencies will be offset by gains from a recovery in the world's third-largest economy. It's not such good news for entrepreneurs like Thamonwan Thawornthaweewong, whose Angry Bird fish balls, squid rings and other products now cost more to sell in Japan.
The yen slipped past 100 to the U.S. dollar earlier this month and is now hovering near 102 yen per dollar — over 20 percent weaker than six months ago versus the U.S. dollar and euro — a level that is giving pause even to Japanese companies and policymakers.
Japan insists the yen has weakened due to extreme monetary easing aimed at breaking out of deflationary stagnation, not because it is trying to make its exports more competitive.
Whether it's intended or not, countries across Asia are seeing their own currencies pushed higher, as their financial markets are flooded with cash pumped out by the Bank of Japan to help double the country's monetary base and hit a 2 percent inflation target.
Travel budgets of tourists from Thailand and elsewhere are stretching further thanks to the weaker yen. But for Thamonwan, whose company earns about a tenth of its sales in Japan, it's a headache. "It's affecting us because Japanese customers need to pay more," she said. "We are now seeing a slight decline in orders from Japan."
The "Abenomics" blend of fiscal and monetary stimulus and promises of reforms championed by Japanese Prime Minister Shinzo Abe helped boost Japan's growth to 3.5 percent in January to March. But the slide in the yen also has raised the possibility of a "currency war" — where countries use their exchange rates as an economic weapon.
Gyrations in exchange rates can hurt business confidence and investment, and if other countries respond to the falling yen by debasing their currencies, Japan could be back to square one. News of weaker-than-expected growth for Thailand in the first quarter added to pressure on its central bank to intervene to curb the baht's rise. Though the Bank of Thailand has refrained from intervening so far, Tokyo can't expect its trading partners to hold out indefinitely for the eventual payoff from the recovery of the second-biggest economy in Asia, after China.
China itself is "not particularly worried," about the weaker yen, since it helps bring down costs for expensive factory equipment and oil imported from Japan, said Kenneth S. Courtis, an investment banker and former Goldman Sachs vice chairman.
"The last time there was such an aggressive devaluation, it blew up Asia," he said, referring to the Asian financial bust of the late 1990s that began when a crisis of confidence in Thailand's economy forced it to devalue its currency.
To a certain extent, Australia's "billabong bonds" as its government debt is dubbed, have replaced Japan's government bonds as a safe haven for global investors, now that the Bank of Japan is soaking up 70 percent of Tokyo's bond sales via banks and other institutions. Australia's central bank recently cut its key interest rate by a quarter percentage point to a record low 2.75 percent, seeking to boost growth and counter the "unprecedented whack," as Australian Treasurer Wayne Swan reportedly put it, from the strengthening Australian dollar.
South Korea's central bank cut its benchmark interest rate by a quarter percentage point to 2.5 percent, while India and Europe have also reduced key interest rates.
New Zealand's central bank intervened in the currency market for the first time in five years, seeking to curb a 12 percent rise in the Kiwi dollar since the middle of last year. The Philippine central bank reportedly has been intervening in the foreign exchange market by buying dollars to curb the peso's rise.
Apart from the risks of escalating devaluations, such tactics may be just the wrong medicine for economies such as Indonesia and the Philippines that already are awash with too much cash, says Rob Subbaraman, chief Asia economist for Nomura.
"The policy challenges are getting more intense," he said.
The worry is that the windfall from Japan's huge monetary easing, added to the floods of "quantitative easing" from the West and efforts to spur lending in China, could churn the already hot markets into bubbles. The 10-nation Association of Southeast Asian Nations recently voiced that concern in a joint statement with the Asian Development Bank that noted potentially "excessive risk taking and leverage, credit expansion, and asset bubbles."
Apart from overheating property markets, economists see signs of trouble in corporate debt and consumer debt, which has jumped 67 percent in the past five years in Asia outside Japan to $1.66 trillion, according to Euromonitor International.
"The quantitative easing by the world's major central banks is having negative spillover effects on the rest of Asia," said Subbaraman. "I worry about the debt buildup. Frothy property markets from China to Hong Kong to Mumbai to Manila."
The long-term danger, he says, is in allowing debt to build up in financial markets that, after cleaning up the mess of the Asian financial crisis, until recently were far stronger than those in the wealthy western countries.
"Asian policymakers should think about taking away the punchbowl," he said. "The economic fundamentals of Asia 'ex-Japan' are weakening. They are not as strong as they were before the global crisis."
Meanwhile, double-digit gains in share prices in many regional markets, where price-to-earnings ratios used to judge value are veering higher, are another worrisome sign, said Rajiv Biswas, an economist with IHS in Singapore.
"The Asian economies are particularly vulnerable because their growth prospects are the best," Biswas said.
In Japan, the Abenomics strategy is having a mixed impact. While automakers and to a lesser extent electronics makers are enjoying higher profits, energy intensive steel mills and utilities are struggling with surging costs, in yen terms, for fuel and other key commodities.
Since utility rates and prices of basic necessities, such as noodles, flour and oil are also rising, while wages have improved only modestly, for only some workers, the impact on demand for imports from the rest of Asia remains unclear. Meanwhile, key long-term interest rates the Bank of Japan is maneuvering to keep low have tended to rise, while mortgage lenders have tweaked their own rates higher.
As the yen has fallen, investors in Japan and elsewhere have begun shifting assets into shares and into other overseas investments in search of higher yields. Japan's net overseas portfolio investments, including equity securities, bonds and money market instruments rose to almost 2.5 trillion yen ($24.4 billion) in March from minus 1.87 trillion yen (minus $18.2 billion) in September.
Japanese investors are more likely to invest in Asia and the Pacific as a share of their total portfolio, compared with investors in U.S. and Europe, said Biswas. "That's something that will be an issue given that the BOJ's quantitative easing policy is going to continue for a very long time."
The search for higher returns by Japan's megabanks and insurers, and other investors, is keeping brokerage AB Capital Securities in Manila, the Philippines, busy.
"We've managed to be in the spotlight of most fund managers who are looking for high yields," said Jose Vistan, its head of research. "Obviously a lot of money that would have gone to the major markets has been coming here to the Philippines and a testament to that would be the record high levels of the equities market."
Associated Press writers Thanyarat Doksone in Bangkok and Teresa Cerojano in Manila contributed to this report.