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Flash: Will the yen depreciation finally rescue Japan from the specter of deflation? – RBS

FXstreet.com (Barcelona) - The accelerated yen depreciation is starting to boost prospects of Japan finally overcoming deflation but also raising concerns about an adverse impact on the economy through higher costs.

Indeed, the suspension of operations at nuclear power plants after the Great East Japan earthquake has altered Japan's energy structure, and rising demand for electric power fuel has pushed the trade account into a deficit. According to Junko Nishioka, an analyst at RBS, “We see little chance of volume and price factors raising Japan's energy costs at this point, but project an extra JPY4tn-5tn for petroleum and LNG procurement due to rapid yen depreciation since Fall 2012.”

Moreover, our analysis suggests the corporate profit upside potential from a weaker yen can offset the projected cost increase. However, a substantial portion of such profit improvement would come from overseas businesses and will not necessarily return to Japan. We also conclude the yen depreciation impact differs by industry and company size, benefitting large manufacturers but increasing procurements costs and sharply reducing profits at non-manufacturing SMEs.

“We expect yen weakness to remain an upside factor for an economic recovery led by large companies. However, Japan cannot avoid a major rise in energy procurement costs unless it restarts nuclear reactors. These trends indicate that discrepancies in profit and energy cost absorption capability will persist.” Nishioka adds.

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The EUR/USD has been relatively sideways during US trading given the observance of the Memorial Day holiday in the United States – as such the pair has been devoid of any catalysts or breakouts thus far.
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