A stronger yen erodes the repatriated earnings of Japanese companies, which are just getting back on track after the March earthquake and tsunami. According to the Bank of Japan’s latest June tankan survey of business sentiment, manufacturers expect the dollar to trade at an average rate of ¥82.59 this fiscal year through March 2012 — and some companies are no doubt ratcheting down their internal estimates even more. Canon Inc. JP:7751 -0.39% /quotes/zigman/192225/quotes/nls/caj CAJ -1.67% , which earns about four-fifths of its revenue overseas, expects the dollar to average ¥80 this year. On Monday, it blamed a strong yen and the March disaster for its 20% fall in net profit in the April-June quarter — and one of its executives hinted at expectations of further yen gains.
“We need to be mentally prepared for the dollar at ¥75,” Canon Executive Vice President Toshizo Tanaka told a news conference, according to the Wall Street Journal. The Ministry of Finance could ask the Bank of Japan to intervene directly in currency markets at any time, to stem the yen’s rise. But financial officials would only make that politically fraught decision if they believed market conditions were right. Read more on yen intervention. Teetering on the brink of downgrades Japan’s no stranger to political wrangling over deficit financing, and it knows first-hand that a country’s debt ratings don’t tell the whole story. Its parliament still needs to pass its own deficit-finance legislation to fund about 40% of this fiscal year’s main budget. That will be no easy feat, with Prime Minister Naoto Kan facing off against the opposition — and even against many members of his own ruling Democratic Party of Japan.
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