[DongleDongle] "Orange Juice Disappeared from the Dining Table"... The Shadow Brought by the Japanese Yen Depreciation

4000 Japanese SMEs Bankrupt
Rising Raw Material Import Costs Due to Yen Depreciation
Food Industry Faces Product Discontinuation and Management Blow Amid Ingredient Price Surge

Amid continuous dark news about the global economy due to recent high interest rates and high inflation, there is one country that has been attracting attention with a series of positive developments. That country is Japan. In June, the Nikkei 225 index reached the 33,000 level for the first time in 33 years, and listed companies achieved an earnings surprise in the first half of the year. The background to the favorable winds blowing through the Japanese economy for the first time in 30 years since the collapse of the bubble economy is the weak yen. Some export companies, such as those in the automobile industry, have earned huge profits from exchange gains due to the weak yen.

However, behind the economic boom caused by the weak yen, there are also significant side effects. Small and medium-sized enterprises (SMEs) and the food-related industries, which do not hold a large share in industry and the stock market, are complaining about the pain caused by the weak yen. Today, we will look at the negative aspects that the weak yen has brought to Japanese society.

About 4,000 SMEs Bankrupted in the First Half of the Year... 30% Increase Compared to the Previous Year

This year has not been an easy one for Japanese SMEs. After the Russia-Ukraine war, international raw material prices surged, and the yen's value plummeted, causing a sharp rise in material import costs.

As a direct hit from the weak yen and high inflation, the number of bankruptcies has increased. According to Tokyo Shoko Research's announcement in July, the number of SME bankruptcies in the first half of 2023 reached 4,042, a 30% increase compared to the same period last year. This is the first time in three years since 2020, when the economy was severely affected by COVID-19, that the number of bankruptcies in a half-year period has exceeded 4,000. In particular, bankruptcies in the manufacturing and construction industries, which have a high proportion of raw material imports, increased by 36% and 37%, respectively, compared to the same period last year.

The impact on the dairy and food industries is also significant. The Japanese economic media outlet Nihon Keizai Shimbun reported that after the Russia-Ukraine war, international grain prices rose, and combined with the weak yen, livestock feed prices surged by 1.5 to 2 times. As a result, the dairy industry, which spends 50% of its farm operating costs on feed procurement, has fallen into great distress. Farm owners struggling with management difficulties are reportedly driving trucks for an hour to save on delivery costs by transporting feed themselves. To overcome worsening management conditions, the dairy industry made a bold decision last year to raise the price of raw milk from the previous 120 yen to 140 yen.

Food manufacturers have also faced major challenges. With food ingredient prices already soaring due to abnormal weather, the weak yen further reduced their capacity to bear manufacturing costs. In September, Hamazuzu, a confectionery contract manufacturer in Yokohama City, filed for bankruptcy proceedings. Despite rising manufacturing costs, retailers were reluctant to raise prices, leaving Hamazuzu in severe financial distress.

Asahi's Bayaris Orange Juice 1.5ℓ product, which has been discontinued.

Since this spring, orange juice has suddenly disappeared from grocery stores. This is due to a sharp decline in orange production and soaring prices after Florida, the largest orange-producing region in the United States, suffered hurricane damage for two consecutive years. As a result, the January delivery price of frozen concentrated orange juice futures (FCOJ) traded on the New York ICE commodity exchange reached an all-time high of $4.17 per pound during trading on the 1st. This was the first time orange juice futures exceeded $4 per pound during trading.

In this situation, the yen's value against the dollar fell to the 150 yen range at the end of October, which is estimated to have significantly increased the raw material import costs that food companies must bear. Asahi Soft Drinks, unable to withstand the soaring raw material costs, decided last month to suspend sales of its 1.5-liter orange juice product starting in December.

Cafes selling bakery menus are also struggling with rising fruit import costs. Japan's private broadcaster NHK recently reported that cafes are suffering management difficulties because they cannot raise prices due to concerns about losing customers despite rising raw material prices such as sugar syrup and imported fruits.

Export Companies Account for 35% of Market Capitalization... SMEs and Household Economy Impact Cannot Be Ignored

As such, many SMEs are suffering from the weak yen. However, the TOPIX index and Nikkei 225 index have reached their highest levels in 33 years, and a favorable wind is blowing in the Japanese stock market. Why does the Japanese economy and stock market seem to be thriving without major damage?

Image source=Reuters Yonhap News

The reason can be found in the high proportion of export companies listed on the Japanese stock market. As of the end of last year, the market capitalization of the three major export sectors in the Tokyo Stock Exchange's Prime Market, composed of top-tier large companies, accounted for 28% (190 trillion yen) of the total. The three major export sectors refer to automobiles, machinery, and electronic devices. Including the chemical and steel sectors, the market capitalization of these five sectors rises to 237 trillion yen, accounting for as much as 35% of the market.

In the first half of this year, export sector companies recorded consecutive strong performances. Toyota Motor Corporation earned an additional 260 billion yen in profits solely from exchange gains due to the yen's depreciation. Semiconductor and chemical-related companies were hit by demand stagnation in China, but about half of the listed companies improved their performance and held their ground despite the slowdown in business conditions. While SMEs went bankrupt due to the weak yen, the Japanese stock market soared thanks to the increased earnings of export companies that make up most of the market capitalization.

However, the management difficulties of small-scale retail companies cannot be dismissed as a minor issue. Although their share in Japanese industry and the stock market is small, they exert a significant influence across the entire Japanese economy. If they pass on the increased import costs caused by the weak yen to product prices, the prices of wholesale and retail goods in Japan could rise. Currently, wages in Japan are not keeping pace with rising prices, resulting in a decline in real wages for 18 consecutive months. If companies pass on cost burdens to consumers, household economies are expected to suffer significant damage. Since household consumption accounts for as much as 50% of Japan's gross domestic product (GDP), a blow to household consumption could further negatively impact national economic growth.

Looking at this economic structure, it is clear that it is premature to be reassured that the Japanese economy has revived solely due to the improved business conditions of large export companies. Although the earnings surprise of large companies due to the weak yen may have boosted the stock market, it is increasingly unlikely to have a positive effect on household economies. Considering the various problems Japan faces, such as low wages and SME bankruptcies, the weak yen is expected to bring as many drawbacks as benefits to Japan.