The volatility of the Japanese Yen (JPY) and its impact to US small to medium-sized businesses has historically created challenges. My experience with international companies enables me to assist business owners and executives mitigate and stabilize financial and operational impacts from this volatility.
The JPY has experienced a long-term decline against the US dollar (USD) since the 1970s. The declining value of the JPY relative to the USD is impacted by the long-term economic and social foundations of Japan and the United States. Japan has experienced slower economic growth compared to the US due to:
- Japan experiencing
- An aging population that began in 2008
- Low birth rates that are 1.3 per women compared to the replacement level of 2.1
- Constrained economic expansion due to prolonged deflation
- High level of Public Debt relative to GDP
- while the US is experiencing
- larger and younger population
- higher level of technological innovation
- a more dynamic labor market
- and benefits of the USD as dominant global reserve currency
As the chart above shows, there has been volatility in this trend reflecting periods of JPY strengthening. One example of this is the impact due to the recent carrier trade situation. A carry trade involves borrowing money in a currency with a low interest rate and investing it in an asset or currency with a higher return. The goal is to profit from the difference between the borrowing cost and the investment return. In July 2024, the Bank of Japan raised interest rates from 0.1% to 0.25%, its largest hike since 2007, which was unexpected. This increase, and anticipation of the US Fed lowering rates, resulted in increasing demand for JPY. Also, between the period of 2010 to 2023, the impacts of the Recession in the US, COVID-19, and monetary policy divergence resulted in a strengthening of the JPY as it was viewed as a Safe Haven currency.
However, the long-term weaking of the JPY reflects Japan’s steady decline from being the second largest economy between 1968 to 2010 to now being the fourth largest economy. Japan faces a declining population, stagnating wages, and lower domestic consumer spending. One projection has Japan’s population declining 30% from 125 million to 87 million by 2070 and current GDP is expected to contract by 0.5% this year.
While a cheaper yen might seem advantageous for consumers seeking cheaper Japanese imports, it presents a formidable challenge for SMBs that import machinery, auto parts, chemicals, textiles, apparel, and services. Japanese manufacturers face higher input and production costs due to a weak yen often increasing prices to SMBs that can more than offset the higher purchasing power of the USD. Additionally, supply chain issues can arise as Japanese companies may prioritize their domestic markets, leading to longer lead times and potential shortages to US importers. On the opposite side, SMBs who export to Japan will find their products less competitive due to the resulting higher prices to their Japanese customers.
- There are ways for SMBs to mitigate the negative consequences of the long-term weakening yen. Given the structural factors leading to a weak yen, it is important to address it strategically.
- Diversifying supply chains is essential to reduce reliance on Japanese imports. Exploring alternative sourcing options, both domestically and internationally, can help mitigate price increases and supply chain risks.
- Invest time and effort to build a stronger partnership with your Japanese suppliers. Be culturally aware of the differences in nurturing a business relationship. Japanese communication is less direct, decision-making is based on a consensus-based process and personal relationship-based “nemawashi”, and internal hierarchical decision-making process takes longer. Nemawashi refers to the process of consensus building.
- On the operational front, cost reduction measures become crucial. Streamlining processes, improving efficiency, and exploring technological advancements can help offset increased expenses.
- Financial hedging strategies can also be employed to manage currency fluctuations that impact both cash flow and balance sheet risk, and financial reporting. Tools like forward contracts and options can help protect against adverse exchange rate movements. It is essential to engage a well-experienced financial expert and working with your bank to manage exchange risk.
In conclusion, the weak yen is a complex issue with far-reaching consequences for SMBs. By understanding the challenges, implementing effective strategies, and staying informed about market developments, businesses can improve their chances of navigating this turbulent environment successfully. It is also important to maintain and nurture a long-term partnership with Japanese suppliers and partners based on a good understanding of the importance of the cultural differences regarding communication style, decision-making process, and relationship-building techniques accordingly to establish effective and productive relationships with your Japanese counterparts.
Truly, the complexities of currency-related risk from the JPY can be mitigated, but SMBs may not have the internal resources or expertise to fully manage this risk. Obtaining expert advice from well-established and experienced experts is important.
If you find this information helpful and want to learn more, contact Francis at francis@cfos2go.com.
For your Talent needs in direct hire, full-time or part-time contract staffing, contact Executive Recruiter, Leesa Meintzer at leesa@2gorecruiting.com.
Francis Ota, co-lead of the International Business Practice group, is a seasoned financial executive with more than 40 years of experience in finance, accounting, and business operations. Born in Tokyo, Japan, and raised in multicultural communities in the United States, Francis brings a unique international perspective to his work. Francis has held senior financial roles at prominent companies such as Hewlett-Packard, Medtronic, and Quest Diagnostics. His expertise spans various industries, including technology, healthcare, and telecommunications.
Leesa Meintzer is an executive recruiter with more than 20 years of experience in talent acquisition. She excels in partnering across various business functions and brings a comprehensive perspective to talent acquisition. She works with Engineering, Healthcare, Product, Finance, Accounting, Business Operations, Sales, Legal, Human Resources, Learning & Development, and Talent Acquisition for corporate and high-growth start-ups.
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