As Japanese Bankruptcies Soar, Goldman Warns "Further Yen Depreciation Could Be A Net Burden"

Tyler Durden's picture

It is no secret that one of the primary drivers of relentless S&P 500 levitation over the past two years, ever since the start of Japan's mammoth QE, has been the use of the Yen as the carry currency of choice (once again as during the credit bubble of the early-2000s), whose shorting has directly resulted in E-mini levitation. One look at the intraday chart of any JPY pair and the S&P500 is largely sufficient to confirm this. Those days, however, may be coming to an end, at least according to Goldman which overnight released a note saying that the Yen is "Almost at breakeven: Further yen depreciation could be a net burden."

Here are the highlights:

The yen has depreciated quickly beyond ¥115/US$ from the ¥107/US$ level since the FOMC made the decision to terminate quantitative easing and the BOJ surprised with additional easing at the end of October. This has prompted concern over possible damage to Japan as a whole if the yen weakens further.


Using industry input/output tables to investigate the costs and benefits of a weak yen, we find that the manufacturing sector still reaps forex translation gains under Japan’s current economic structure. However, in materials and nonmanufacturing industries that have limited opportunity to pass on forex-driven cost growth to exports, the costs of a weak yen far outweigh the benefits. According to our calculations, a 25% decline in the yen’s valueresults in a ¥4.1 tn net cost increase for Japanese industry as a whole since 2012 and a ¥10.5 bn increase in household sector import inducement.


By contrast, the decline in commodity prices is a substantial relief. A 10% decline in commodity prices cancels out the increase in net cost borne by 14.5% yen depreciation. The 25% decline in commodity prices so far (oil price) offsets the net cost increase borne by 35% yen weakness. Calculating from the late 2012 rate of ¥78/US$, 35% depreciation works out to a rate of ¥120/US$. In other words, the combination of the oil price around US$80/bbl and the yen exchange rate of ¥120/US$ is just about at breakeven, netting out the benefit and cost of yen depreciation and oil price decline since Abenomics began.


That said, our commodities research team sees limited scope for further decline in crude oil prices, while we expect the yen to depreciate further as the FRB and BOJ’s policies diverge. If further yen depreciation is not accompanied by real economic growth in the form of an export volume recovery and broad wage increases, and ends up merely producing forex translation gains, we believe it could very well place an increased burden on the Japanese economy as a whole. Needless to say, the cost burden will ease if the rapid decline in oil price over the last few days stabilizes at the low levels.

Oddly enough, one can almost make the case that the collapse in crude price has been manufactured to allow Japan's QE to continue as long as possible. And yet, this is hardly comforting news to Japan's companies, which as shown in the chart below, are seeing a surge in bankruptcies unseen in recent history. This is how Goldman explains this:

For the nonmanufacturing sector, yen depreciation means growth in net cost, increased burden for corporate and household sectors


Nonmanufacturing industries export little. Most of the goods they produce are consumed domestically. Imported intermediate products used as raw materials in the nonmanufacturing sector amount to only ¥8.6 tn, but we estimate that depreciation-linked input cost is ¥40.3 tn as this includes electricity/gas used at retail stores and event spaces as well as fuel (oil) costs for transporting goods. Nonmanufacturing sector exports, meanwhile, amount to just ¥18.5 bn. A 25% decline in the yen’s value raises the input cost by ¥10.1 tn, but this far exceeds the additional export receipt of ¥4.6 tn, resulting in a net cost increase of ¥5.5 tn. This additional cost must be borne by the “domestic sector” in Japan—i.e., the corporate or household sector.


Keeping personnel costs in check is key for companies forced to bear increased costs due to yen depreciation. Personnel costs have a high weighting in the nonmanufacturing sector, and if the yen continues to weaken it will be difficult to continue raising wages unless sales rise commensurately with cost increases. Cost increases in the nonmanufacturing sector due to yen depreciation have an ultimate ripple effect on the household sector because the  higher costs are passed on to retail prices and/or they prompt companies to rein in personnel costs (see Exhibit 2).



Costs of yen depreciation outweigh benefits for industry as a whole: Policies for addressing weak yen effect appear limited based on past experience


A similar calculation made using input/output tables for 2005 results in a “net export” figure of ¥16.3 tn for the manufacturing sector. Even after  subtracting nonmanufacturing sector “net cost” of ¥14.9 bn, net exports of ¥1.4 tn remain, indicating that policies to offset the impact of a weak yen had a positive impact on the Japanese economy as a whole. The secular rise in crude oil prices from 2005 significantly raised the cost of intermediate inputs—mining, oil, and coal products—for both manufacturing and nonmanufacturing. For industry as a whole, input costs affected by yen depreciation increased to ¥86.6 bn in 2012 from ¥71.8 tn in 2005. Over the same period, exports of goods and services from Japan declined to ¥70.3 tn from ¥73.2 tn due to yen appreciation, the global financial crisis, and the March 2011 earthquake. The lack of growth in exports is due partly to the global demand cycle, but a larger structural factor is that Japanese companies have lost global  market share due to the shift of production overseas and increased competition with foreign products.


In 2012, the structure of the Japanese economy was that manufacturing sector had net export value of just ¥5.5 tn, which was insufficient to offset the nonmanufacturing sector’s net cost of ¥21.8 tn, resulting in net cost of ¥16.3 tn for Japanese industry as a whole. A 25% decline in the yen’s value raises industry’s net cost burden by ¥4.1 tn, which is equivalent to 0.8% of GDP. The impact of weak-yen policy measures based on experiences when Japan was a net exporter, has clearly diminished.


Bankruptcies precipitated by yen depreciation on the rise


According to a recent bankruptcy survey by Tokyo Shoko Research, there were 214 bankruptcies due to the weak yen in January-September 2014, which is 2.4 times the 89 seen in January-September 2013. Far more of the bankruptcies were in the nonmanufacturing sector—81 in transport, 41 in wholesale trade, 19 in services, and 11 in retail—than in the manufacturing sector (44), which is consistent with our analysis based on the input/output tables.


Surprisingly, the number of bankruptcies since 2013 due to yen depreciation far surpasses the number of bankruptcies in 2009-2011 due to yen appreciation. Presumably, in many cases in 2009-2011 the strong yen was not cited as the direct cause of bankruptcy because there were numerous other factors at work also, beginning with the sharp slowdown in the global economy and financing difficulties. Nevertheless, the 353 bankruptcies since  2013 attributed to the weak yen are 2.2 times greater than the 157 bankruptcies from 2009 to 2011 attributed to the strong yen (see Exhibit 3).


And it is not just corporations that are approaching their weak-yen breaking point. So are households:

Household burden increases with weaker yen


Let us turn to the household sector. The input-output table has a matrix of “import induction value by final demand categories”. This shows the value of goods and services imports induced by final demand categories such as household consumption, private business investments, public fixed investment and exports (see Exhibit 4).


Household sector final demand totaled ¥279 tn in 2012, with imports accounting for ¥41.9 tn, or 15.0%, of household consumption. This includes gasoline and mineral fuels (oil, coal) needed to generate electricity for households. Taking into account the decline in the yen’s value since 2012, household sector import value has risen ¥10.5 tn to ¥52.4 tn. The ¥10.5 tn rise is equivalent to 3.6% of 2012 household sector disposable income of ¥287 tn. 


In 2005, imports represented ¥32.8 tn of household final consumption. This figure rose ¥9.1 tn to ¥41.9 tn in 2012, and if we take the 25% decline in the yen’s value into account, the rise comes to ¥19.6 tn over seven years. Mining, oil, and coal products account for 50% of the rise since 2005, clearly showing how the rises in gasoline, kerosene and electricity prices due to yen depreciation increased households’ burden.


Household final consumption was largely unchanged during this period, rising just barely from ¥277 tn in 2005 to ¥280 tn in 2012. This means that domestic consumption of goods and services declined to the same extent that import consumption value increased. Disposable income declined just slightly over this period, to ¥287 tn from ¥290 tn, meaning that the rise in import costs for households due to yen depreciation was borne directly by households, causing them to curb their spending.


Food and fuel-related imports in the household sector totaled ¥22 tn in 2012, accounting for 54% of household sector imports of ¥41 tn. The recent decline in crude oil and other commodity prices is partially offsetting the impact of the weak yen, but not the rise in costs due to yen depreciation on the 46% of imports that are not food or fuel-related.

Goldman's conclusion:

If further yen weakness is not accompanied by real economic growth in the form of an export volume recovery and broad wage increases, and ends up merely producing forex translation gains, we believe it could very well place an increased burden on the Japanese economy as a whole. Needless to say, the cost burden will ease if the recent rapid decline in oil price stabilizes at the low levels.

Needless to say, none of this is preventing the momentum-chasing algos to push the USDJPY up some 100 pips in the overnight session to offset the tumble in energy companies and push the S&P higher, and send it almost back to the highest level seen since 2007. And once the USDJPY trigger the 119 buy stops, all bets are off, if only for the Japanese economy. The Nikkei and the S&P 500 on the other hand, well those will keep rising as more economic devastation rains on Japan's economy thanks to Abenomics.

Then again, with Paul Krugman now openly advising Abe, it should come as no surprise that Japan's economy is in the late stages of a total and unprecedented collapse.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
HedgeAccordingly's picture

Best m&a week last week since July. Obama "dim" on Africa power pledge

Vampyroteuthis infernalis's picture

Best m&a week last week since July. Obama "dim" on Africa power pledge.

Obama is just dim in general. He obviously doesn't care about his native continent.

El Oregonian's picture

Goldman Sachs? I believe the wrong turkeys were slaughtered yesterday...

MalteseFalcon's picture

For 95% of America a cheap yen is a boon.

Beatscape's picture

Is there an equivalent Japanese saying/axiom for "no free lunch"?  Does Krugman not see this side of the equation? 

WTFUD's picture

Whenever i read Goldman warns . . . well i wont say as i took an early New Year's resolution to refrain from using unnecessary profanities. CUNTS

wrs1's picture

Just musing but the Yen may have more to do with the decline in oil than any of the other conspiracy theories.  The lower price of oil allows the Yen to decline without collapsing Japan due to soaring costs of imported oil. If these are coordinated CB actions to keep the game going then lowering oil from that standpoint makes sense.  

i_call_you_my_base's picture

That occurred to me too. And it would mean that Japan is a lynchpin in the global economy and if it falters, then watch out.

sun tzu's picture

OPEC would have to go along with it and what's in it for them to bankrupt themselves? Oil prices can only be kept low for a few years until drillers go bankrupt and no new projects go online to replace the old depleted wells. Well there is anothers way, a worldwide recession or depression. That's what the CB's are trying to avoid or deny.

wrs1's picture

What's in it for OPEC to bankrupt themselves by letting the price fall by not cutting production?  If they could cut production by 5% and increase the price by 20%, why not do it?  None of this makes any sense based on supply and demand for oil as well as normal economic relationships with stocks and economic health that have held for quite a long time.  The only reason I can imagine is some non-economic reason such as keeping the Yen viable in it's use as a way to increase  stock prices and so contniue to provide an outlet for hot money that isn't commodities.  Oil has crashed the hardest since the beginning of October without respite, beyond the slight oversupply in the markets.  

Augustus's picture

The same factors which crashed the NG market a couple of years ago are at work in the US oil supply.  Drill Baby, Drill.

Whatever the OPEC cut could be would be made up in another two years by the frackers.

However, the OPEC cannot really drive the frackers from the supply side.  Sure, some levered companies will possibly have to take the bankruptcy cure if prices stay low long enough.  However, the shale reserves are still there and are well known at this point.  It only takes a month or two to drill and complete a well.  So if prices do increase 20%, it will be back to Drill Baby, Drill within six months with a lot more price hedging by US producers.

wrs1's picture

I think there are enough rich shale plays that can be profitable at these lower oil prices that drilling is going to continue.  Besides, I think most of the drop has ben financially engineered and will unwind pretty quickly.  OPEC is going to flinch sooner than the independents in Texas.

i_call_you_my_base's picture

Hopefully when Japan craters people will see that Krugman is a charlatan. But I doubt it.

WTFUD's picture

what like the economist has no clothes?

sun tzu's picture

The Keynesian psychopaths will simply claim there wasn't enough QE and it should have been doubled or tripled.

sun tzu's picture

First we nuke them and now they nuke themselves. 

Atomizer's picture

Carry Trade us to the next quarter.


Bell's 2 hearted's picture

"Household burden increases with weaker yen"

Abe: "huh, ... what?"

Bell's 2 hearted's picture

"If further yen weakness is not accompanied by real economic growth in the form of an export volume recovery and broad wage increases,"


Japan not operating in a vacuum ... only a matter of time before other mercantile countries respond (ie: devalue currency) if their exports show slippage

Atomizer's picture

Bring back the Walkman to stabilize YEN /Kidding. Apple is heading down this same dumpster drop. Unless, they move opererations to Africa. Silk Road bullshit.


The history of the Walkman: 35 years of iconic music players

Bell's 2 hearted's picture

CRB (commodity basket) down over 3% ... at 4 year low

cowdiddly's picture

In all actuallity the Yen is a worthless Zibabwe currency being propped up by FX crooks and derivatives. Just when you think they could not distort the markets further........well they distort things even more.

Some of today's highlights

OIl at $68 dollars and in freefall below production costs for most everyone but a scrawny 11million BPD of Saudi Light and UAE, Qatari.

Stocks setting new highs daily on continuos profit margin downgrades. Stoneage PE or Price to sales? anyone remember these?

The US 10 year bond hits 2.2%.... Yepper loan the gov't money at below the real inflation rate, thats a get rich quick scheme for sure. I guess Uncle Sambo hopes you forgot how to do a simple FV calculation on returns.

The  Silver / Gold ratio is now at 75-6:1, but Slver is currently coming out of the ground at about 9:1


Do not play in these corrupted markets


disabledvet's picture

Oh, yeah. That huge Japanese interstate highway with all those 18 wheelers. All those long winters. Huge oil burners to generate electricity.

I mean seriously there is not much demand for oil period outside the USA and Northern Europe and even that demand is falling as most of the USA moves South and West.

Just keep that housing bubble going and everything will be fine.

teslaberry's picture

The fed tbtf cartel coordinates with boj to devalue yen after qe4 while getting caught red handed in fx and pm  scandals.


Why bother even reading a goldman reportOne way or another its filled with deliberately deceptive half lies....


Atomizer's picture

Keep splining the free shit market to indoctrinate a broken derivative banking scam.

The Sisters of Mercy -- Lucretia, My Reflection


World Bank | Click your debt, follow up with IMF & BIS. Then ask about your scam wealth package ariving in the mail via USPS.

yogibear's picture

The quicker Japan prints itself to 0 the better.

It's a US Federal Reserve zombified country.

The Most Interesting Frog in the World's picture

Alibaba Massive Fraud

Unrelated, but I believe highly important none the less.  We have some smart people on ZH and curious if anyone else has heard or read about this.  I am hoping someone that has the time and resources can look in to this and do some homework.

I was listening to The John Batchelor Show one night about a week or so again.  He is on the radio and can be found online.  Incredibly well versed on many international topics and world history.  I highly recommend you tune in to him when you have a chance.

In any event, he had three guests (from China) on and the discussion was surrounding a massive fraud at Alibaba.  The story goes something like this.  Alibaba is a marketplace and they collect a fee on each purchase from merchandisers that operate via their website.  Alibaba understands net profits and margins are of little concern to Wall Street, but growth in revenues and now we are talking.  Many multiples for "growth" in a global economy that is barely creeping along.  So, Alibaba hires a network of thousands to simply buy and return products all day.  If Alibaba held inventory this fraud would be somewhat more difficult to pull off, but with thousands of businesses connected to Alibaba it is very easy to hide the costs of labor and returns in underlying (most likely very closely held) companies.  Afterall, billions of $'s in stock price appreciation will pay a lot of people to sit on a computer all day and buy and return stuff on their website.

This is massive securities fraud and according to the guests, the scheme is "well known" in China.  Besides the financial statement fraud, one would have to wonder what type of due diligence was done by the investment bankers that brought Alibaba to market?  

I don't know about you, but I think this could be a watershed Enron-like, Madoff-like story.

AdvancingTime's picture

The yen is sitting on a multi-year low and it is clear that the prospects for Japan are lousy. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency.

This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world. They are past the point where they can return to a "free and fair market" interest rate marketing their bonds to the world and still be able to pay the debt service.

The moment the Japaneses stock market fails to rise enough to offset inflation and realizes even a weaker yen will not help we will see a tsunami of money fleeing Japan. This will constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.

GreatUncle's picture

Japan is trying to break free from the grip of deflation by printing money trying to generate elusive growth.

Not a chance the rest of the world is falling into exactly the same Keynesian trap of borrowing and only ever paying the interest on the debt when the income can no longer service the interest payment.

THe only reason Japan did not go bust when its banking system went tits up is because the rest of the world was able to partly support it.


THE PROBLEM no matter how much they create the interest on the debt and any increase makes it unaffordable.

WHERE POPULATIONS ARE STUFFED is those that benefit from the economic system the most will abuse it to maintain their position and in their minds all us plebs can go die.