Why a weaker yen is a double-edged sword

The Week
Tokyo Disneyland says it expects more visitors this year thanks to a weaker yen.
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Tokyo Disneyland says it expects more visitors this year thanks to a weaker yen.

How a less valuable currency can help — and hurt — Japan's economy

The dollar just rose above ¥100 for the first time since April 2009, thanks to Japan's efforts — dubbed "Abenomics" for new Prime Minister Shinzo Abe — to combat deflation.

That means "one Japanese yen is now worth less than a penny," says Business Insider's Matthew Boesler. "That's a key psychological level for" a government that has taken an aggressive approach to help its sagging economy, including doubling the supply of yen by effectively printing more money. The goal has been "to weaken the currency in hopes that a lower yen will help the country lift itself out of a deflationary state," says Boesler

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In other words, while a weaker yen might sound like a bad thing, it's exactly what Japan has wanted.

The yen's recent strength has been a challenge for Japanese companies, undercutting "big industrial exporters in their attempts to sell against their Korean and German rivals," says Takashi Mochizuki at The Wall Street Journal.

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The yen's fall is expected to help. Toyota, for example, predicted "profits and sales will climb to the highest in six years as the weakening yen gives it an edge over General Motors and Volkswagen," say Anna Mukai and Masatsugu Horie at Bloomberg.

The weaker yen is also expected to be a boon for domestic tourism, drawing record crowds to Japan, according to Bloomberg's Yuki Yamaguchi. Airlines, Japan's bullet train operators, and even Tokyo Disneyland said they expect more visitors this year.

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But the yen's fall may have a downside, too, says Eleanor Warnock at The Wall Street Journal. As the currency weakens, "prices of imported goods and raw materials have risen quickly." Even products such as toilet paper and tissues have jumped by 10-15 percent.

The yen's decline may also present a "power conundrum" for Japan, says Javier E. David at CNBC, "pushing the country back into the embrace of nuclear technology." Japan has avoided nuclear energy since the meltdown at the Fukushima Daiichi plant in 2011, but its lack of natural resources has forced the country to rely largely on imports of fossil fuels and liquefied natural gas. 

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With a weakening yen, higher import prices might force Japan to "consider restarting the country's arsenal of nuclear power plants," says David.

Furthermore, as energy prices rise, Japanese companies may find that the extra costs will make it more difficult for them to compete.

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