Strong yen hurts Japan

Share prices in Japan ended September on a positive note and the Nikkei 225 index rose by 6.2% over the month as a whole. Even so, the index ended the third quarter in negative territory, falling by 0.1%. Investors remain concerned about the power of the global economic recovery and, according to figures released during September by the Investment Management Association, Japan was one of the worst-selling fund sectors during August, surpassed only by North America.

Investor sentiment towards Japan remains constrained by ongoing concerns that the debt crisis affecting some European countries will hinder the global economic recovery and hence demand for Japanese exports. The country’s exporters are also preoccupied by the sustained strength of the yen, as a strong yen increases the cost of Japanese goods for overseas buyers.

Machinery orders increased during July, rising by 5.7% month on month, but industrial production registered an unexpected decline during August, stoking fears Japan’s export-led recovery has run out of steam.

Some of Japan’s leading companies – for example, Panasonic – are shifting part of their production abroad, which will reduce exposure to currency risk. Japan’s Finance Ministry sold yen for the first time in six years during September as the currency’s persistent strength continued to throw economic recovery off course, and this intervention provided a welcome boost for beleaguered exporters.

Looking ahead, the quarterly Tankan business confidence survey indicated that, although readings for the third quarter showed signs of improvement, Japanese companies have grown increasingly pessimistic as they move into the fourth quarter of 2010. Pessimists are expected to outnumber optimists by the end of the year. The results of the Tankan boosted speculation the Bank of Japan (BoJ) might decide to expand its credit programme.

During September, games manufacturer Nintendo downgraded its profit forecasts and cut its full-year dividend. The company warned that its new handheld gaming device will not be released in time for the important holiday season, amid concerns over the strength of the yen and problems surrounding production.

Companies’ sales increased by 20.3% during the second quarter, and retail sales rose by 4.3% in August, although the rise was somewhat smaller than hoped. Meanwhile, consumer confidence in Japan remains low and there are fears an increase in risk aversion could hamper a recovery in internal demand. According to the BoJ, Japanese households have become more defensive, having increased their cash holdings amid unrelenting doubt about the outlook for the economy.
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