Stronger yen to have an impact on trade but will benefit tourism.
THE world has been gripped by the unfolding crisis in the northeast of Japan where an earthquake, tsunami and nuclear catastrophe has killed lives, damaged property and now threaten to sour sentiment and confidence in the world's third-largest economy.
Just like in 1995 when an earthquake had damaged the city of Kobe, the yen spiked in anticipation of the huge cost to rebuild the city.
This time around, the yen surged to an all-time high against the greenback at 76.25 per dollar as the amount of money needed to rebuild Japan's infrastructure is estimated to run into hundreds of billions of dollars, which is much more than the cost to reconstruct Kobe.
Back in 1995, the yen appreciated and stayed strong against the dollar for about six months but this time, a coordinated effort by G7, a grouping of the world's largest economies, has engineered a weakening of the yen because a persistently stronger yen would have sunk the export-oriented Japanese economy into a deeper recession than what the earthquake and tsunami would have done.
A clerk changes the rates of foreign currency at a shopping district in Seoul, South Korea
For Malaysia, the impact from the tragedy in Japan will reverberate through the economic supply chains but the first financial consequence will be the stronger yen and its impact on trade.
Japan is Malaysia's third-largest trading partner. It buys about 10% of Malaysia's exports and supplies nearly 13% of imports.
The bulk of Malaysia's exports are in the form of natural resources such as liquefied natural gas, crude oil and palm oil. Electrical and electronics goods also form a big portion of exports to Japan.
A dip in Japan's economy will affect demand for goods from Malaysia as it has been forecast that a 1% decline in Japan's growth will shave 0.2% off Malaysia's growth.
Disruption to Japan's supply chains will temporarily affect shipments of goods between the two countries but a higher yen will certainly affect the cost of goods coming from Japan to Malaysia, and the demand for Japanese goods in this country.
All eyes have now been fixed at the automobile sector as new Japanese cars and components will cost more once the inventory of existing stock runs out.
Proton, Perodua, Toyota, Honda and Nissan are the best-selling makes in the country and each have varying degrees of exposure to the yen. Those that rely on completely-knocked-down parts and components from Japan will feel the margin squeeze from a prolonged stronger yen and it will be worth watching if higher costs are passed on to car buyers in the months ahead.
Loans that have been taken in yen, such as those by Tenaga Nasional Bhd where 22.8% of its RM24bil debt is denominated in yen, will be a burden on companies. A stronger yen will also bite into the balance sheets of companies engaged in major infrastructure works such as the Penang-Selangor water transfer project for as long as the yen stays stronger against the ringgit.
One way a stronger yen will aid Malaysia will be in tourist arrivals because 415,881 Japanese travelled to this country last year, a 5.1% increase from 2009. But that will depend on the mood of the Japanese people, which accounted for 1.7% of tourists coming to Malaysia, to travel after the disaster.
Malaysians visiting Japan will feel the pinch of a stronger yen but if the reluctance to travel to Japan is widespread, then there may be lucrative deals from hotels and other tourist attractions to get foreigners to come to Japan, like what happened in Thailand after the tsunami in 2004.
Another impact on Malaysia would, nonetheless, be on investments flowing into the country. Japan is the second-largest foreign investor in Malaysia's manufacturing sector in 2010. Should Japanese firms need cash to rebuild damaged or destroyed factories back home, then those that are already here might repatriate cash back to Japan while those thinking of coming to Malaysia might reconsider their plan.
In the end, the consequences of an economic downturn and a stronger yen will be detrimental for Malaysia but the pain is minuscule to the problems in Japan.