Japan pushes big companies to pass yen benefits on to suppliers

[TOKYO/NEW YORK] The Abe administration plans to push Japan's large exporters to pass on benefits from the weaker yen to suppliers hurt by higher costs for imported raw materials, Deputy Economy Minister Yasutoshi Nishimura said.

"While the weak yen has been good for the Japanese economy overall, there has also been a negative side to that," Mr Nishimura, 52, said in an interview Tuesday at Bloomberg headquarters in New York. "We will win an agreement by asking via the Keidanren that the big companies that benefited from the weaker yen pass on those benefits by lifting prices to suppliers." The Keidanren is Japan's biggest business lobby.

The plans reflect angst in some quarters of the Japanese economy about a policy of reflation and monetary expansion that has sent the yen to its weakest against the dollar in eight years. While large exporters have seen profits swell - firing up the nation's stock market - they have been reluctant to boost domestic investment or increase wages much more than the pace of inflation.

Prime Minister Shinzo Abe has repeatedly called on the country's large corporations to step up their contributions to his campaign to end two decades of stagnation. Finance Minister Taro Aso has suggested a levy on retained earnings should be examined.

Mr Nishimura said that medium- and small-sized companies were hurt by the weak yen, which lifted the costs of imported raw materials. He said the government had compiled a supplementary budget to support these companies and will try to convince big exporters to raise the prices they pay suppliers.

The deputy economy minister is helping spearhead the government's reform plans as the right-hand man to Economy Minister Akira Amari, a key architect of Abenomics. Six years ago, when Abe's Liberal Democratic Party was out of office, Mr Nishimura ran for the party leadership, losing out to Sadakazu Tanigaki. He was elected to parliament in 2003 after a career in the civil service.

The 29 per cent decline in the yen against the dollar since Mr Abe took office in December 2012 has helped companies including Toyota Motor Corp. and propelled the Nikkei 225 Stock Average through 20,000 in April for the first time in 15 years.

Even so, reluctance of companies to increase investment is hobbling a recovery from the recession that followed last year's sales-tax increase. Capital expenditure fell for a third straight quarter in the three months through December, capping economic growth at an annualised 1.5 per cent after two quarters of contraction.

Twenty years of a deflationary mindset makes it difficult to change attitudes, said Mr Nishimura, a law graduate from the University of Tokyo who later went on to the Graduate School of Public Policy at University of Maryland. He was in the boxing club in college and compiled a record of 9 wins and 2 losses, according to his website.

The yen's depreciation has drawn scrutiny from South Korea, Japan's main export competitor, as companies including Hyundai Motor Co. and Samsung Electronics Co say the strongest Korean won against the yen in seven years has hurt earnings.

"We're not targeting any levels" for the currency, said Mr Nishimura, a native of Akashi, a city near Kobe in Hyogo prefecture. "Each country has different fundamentals and exchange rates will reflect that."

The issue of higher costs for importers and smaller companies is drawing concern in Mr Abe's ruling Liberal Democratic Party. Policy chief Tomomi Inada said in an interview that Japan needs to address the negative impact on both small companies and regional parts of the economy.

The number of Japanese bankruptcies linked to the weak yen surged to 345 last year, about 2.7 times that of 2013, even as the total number of failures declined 11 per cent, according to Teikoku Databank Ltd.

Moves in foreign exchange rates aren't harmful as long as they reflect economic fundamentals, Bank of Japan Governor Haruhiko Kuroda said in March.

Analysts anticipate the yen will continue to weaken as the BOJ maintains its campaign to push inflation to 2 percent by enlarging the monetary base. The central bank, which refrained from boosting monetary stimulus on April 30, has pledged to keep up its efforts until its objectives are reached.

"The key driver for the yen has become QE and the expectation of QE," HSBC Holdings Plc analysts including Izumi Devalier in Hong Kong wrote in a note last week, referring to the BOJ's quantitative easing program. HSBC sees the yen ending the year at 125 per dollar. It was at 119.94 as of 7:14 am in Singapore trading.

BLOOMBERG