TOKYO Jan 27 After falling by almost a fifth since Japanese Prime Minister Shinzo Abe came to power just over a year ago, the yen is in a sweetspot for the economy.
Companies have roared back with bumper profits as the currency's slide to five-year lows made exports more competitive and while import prices, notably for fuel, have climbed, importers are benefiting too.
But should the yen keep falling, the drawbacks of higher import prices and possible anger from Washington and other trading powers could start to outweigh the benefits of a weaker currency. Those benefits start shifting to drawbacks if the yen slips to 120-130 per dollar from its current Goldilocks' range of 100-110.
The yen may weaken further as the U.S. Federal Reserve slowly tightens its dollar-liquidity spigot while expectations grow that the Bank of Japan will increase its own flood of money into the economy to offset a sales-tax increase in just over two months, say Japanese executives, policymakers and investors.
"I don't think many people in Japan want a yen decline to around 120 or 130 to the dollar," said BOJ economist Nobuyasu Atago, who is now on a stint at the Japan Center for Economic Research. "Many companies have already moved production overseas and may also become hesitant to boost exports for political considerations."
Indeed, Japanese firms are not clamouring for a further drop and they believe the yen's fall has largely run its course, a new Reuters poll shows. For years, a strong yen had sapped Japan's export competitiveness and worsened its deflation.
For the past two months, the dollar has traded between 100 yen and its high at the start of the year of 105.44. That is the peak for the U.S. currency since October 2008 - the early days of the global financial crisis, when investors began fleeing risk for the perceived safe haven of the yen.
It ended Friday trading at 102.28, having slipped in recent days as stock markets fell.
HITTING THE SPOT
Executives at about half the 400 companies in the Reuters Corporate Survey said they both expect and hope the yen will be in its current narrow range of 100-105 to the dollar six months from now, while more than 90 percent predict and want to see the Japanese currency in a broader 90-110 range. Only 5 percent wanted the yen to weaken beyond 110 to the dollar.
Even the losers from the weak yen see its broader benefits for Japan.
"For us the weaker the yen gets, the tougher it gets," said Yoshiharu Ueki, president of Japan Airlines Co, which pays for its aircraft and fuel in dollars.
"But it is important for Japan's economy to rebound, so a level of around 100 yen is necessary" and weakening a bit beyond 105 yen would be better, Ueki told reporters at a new year's gathering of business leaders. "We can adjust to it as long as there is stability."
Mitsubishi Heavy Industries Ltd, Japan's leading heavy-machinery maker and aerospace company, would be "grateful" for a yen slide to 115-120 to the dollar, said chairman Hideaki Omiya.
And yet, he said, "I think the yen is balanced at the moment around the 100-105 yen level. From the viewpoint of both importers and exporters, a skewed rate is not good. And with the strong yen reversed, what we need now is stability."
Both China and South Korea - major trading rivals to Japan which compete in a number of markets such as auto and electronics - have raised concerns about the slide in the yen in recent weeks.
The United States has welcomed Japan's economic rebound after Abe came to power 13 months ago promoting a policy mix of massive BOJ easing and government spending - dubbed Abenomics by the media.
If the yen's fall is the result, rather than the aim, of these growth policies, Washington seems willing to tolerate a gentle yen decline - to a point.
"They need to get their domestic economy growing," Treasury Secretary Jack Lew said this month. But he said, taking questions at a forum, "their long-term growth can't be rooted in a strategy that ultimately turns in any way towards reliance on an unfair advantage because of the exchange rate."
He added, "We continue to analyse it very closely."
Ted Truman, a former senior official at the Treasury Department and the Fed, said that as long as the Japanese "are not deliberately acting to push down the yen, I don't think, as a matter of economics, the United States government would be particularly unhappy."
But it was possible some U.S. officials suspected that Japan was "encouraging further depreciation of the yen by winking and nodding, if not overt actions," said Truman, a senior fellow at the Peterson Institute for International Economics in Washington.
If that is the case, "I'm sure the Treasury is making clear to the Japanese that if there is any hint of that going on, it will be a big problem," Truman said. "And we have enough problems with Japan as it is."
Still, current and former Japanese officials knowledgeable about currency diplomacy say a yen fall to 110 to the dollar might not raise the heat on Tokyo - that the threshold might be more like 120-130 yen.
Treasury and Japanese Finance Ministry officials declined to comment on their currency conversations.
IMF Deputy Managing Director Naoyuki Shinohara, who was Japan's top currency official from 2007-09, shrugged off concerns that the yen's weakness could lead to tensions between Tokyo and Washington.
"It is clear that what Japan is trying to do now is beat deflation," he told Reuters in an interview. "There may be some changes in the way (the U.S. government) communicates due to its relations with Congress. But I don't feel Japan's weak yen is seen as a big problem."
Of course, no one can rule out a yen decline that turns into a plunge. One trigger could be if the markets lose confidence in Japan's ability to control its debt, especially if the Abe recovery should derail.
So far, despite having public debt far above 200 percent of GDP - the heaviest burden in the industrial world - Japan can still borrow 10-year money at less than 0.7 percent. But Abe has ramped up government spending to spur recovery, and the BOJ is gobbling up most of the government's bond sales - practices that cannot continue forever and could someday unnerve investors.
Japanese government figures show Abe cannot meet a promise to balance the budget in coming years on the current course, the first time official figures have confirmed a view already held by many economists, Reuters reported on Friday.
In the Reuters corporate survey, four out of five companies expected a euro-style debt crisis in Japan within a decade, although few fear it is imminent.
"All it might take is a small event to trigger a catastrophic shift in the perception of Japan," said Neal Gilbert, market strategist at Gain Capital in Grand Rapids, Michigan.
"If one of the major rating agencies suddenly downgrades Japan, citing the potential ineffectiveness of Abenomics, confidence in the programme could change overnight, and the yen could bear the brunt of that sea change," he said. "As we've seen recently in Europe, once the fear train gets rolling, it takes an incredible amount of effort to bring it to a stop."