A sharp fall in the value of the Japanese yen over the past year is casting a deep shadow over government efforts to shore up the world’s No. 3 economy as the impact of the COVID-19 pandemic continues to take a toll on a wide range of businesses and industries.

In the past, a weaker yen was generally welcomed, particularly by Japanese carmakers and other export-oriented manufacturers, because they profited hugely from every single 1-yen drop. But that was then.

The yen’s nosedive in value against other currencies is expected to continue next year and beyond, heightening concerns that consumers will bear the brunt of the pain in the form of surging prices of imports while their salaries remain flat.

One sector that is keenly feeling the effects of the falling yen is the restaurant industry. That is because Japan imports the bulk of its food needs, from meat to coffee to soybeans.

Toshio Yamazaki, who operates Restaurant Ikki, which specializes in home-style dishes in Tokyo’s upscale Ginza district, feels he is in a Catch-22 situation most days due to the spike in prices following the yen’s depreciation.

His woes started to add up soon after the public health crisis first flared in early 2020.

First, the Chinese tourists who used to fill his establishment disappeared as travel restrictions came into effect.

With fewer customers showing up, Yamazaki, 70, was forced to cut prices in the hope of attracting more Japanese patrons.

By October, he found himself paying nearly 50 percent more some days for imported chicken. The price rose to more than 1,000 yen ($8.70) for 2 kilograms, compared with 680 yen he was used to paying for the same amount.

The cost of a jar of mayonnaise rose almost overnight by 100 yen or so.

But Yamazaki says he cannot afford to raise his menu prices for fear of alienating customers.

“It will turn them away,” he said.

The domestic corporate goods price index, which reflects price levels of transactions between businesses, including purchasing expenses, surged by a record 9 percent year on year in November for the ninth consecutive month of increase compared with the same period in 2020.

The yen-dollar exchange rate hovered at the 103 yen level at the beginning of this year. In November, the rate fell to 115 yen to the dollar, marking this year’s low.

The real broad effective exchange rate for the Japanese currency was put at 67.79 in November by the Bank of International Settlements, the same level as in August in 1972. 

In effect, the yen’s strength has dropped to the level of 50 years ago.

Businesses have tried desperately not to pass on price increases to consumers, but there is a limit to what they can do.

For example, the consumer price index, which charts the prices of goods and services bought by consumers, rose for three months in a row from September, compared with the same period a year previously.

SYMBOL OF DEFLATION

The price of a “gyudon” bowl of rice topped with beef is widely regarded as a symbol of deflation as its cost remained largely unchanged over many years.

But three leading chains well known for the dish have raised their prices of a regular-size bowl since September: Sukiya Co. now charges 400 yen, up 50 yen; Yoshinoya Co. charges 426 yen, up 39 yen; and Matsuya Food Holdings Co. has raised prices of its staple dish by between 60 yen and 90 yen to 360 yen in many areas outside the Kanto region.

The operators say the price hikes are due to a surge in the cost of U.S. beef caused by growing demand in China, combined with increased distribution and container costs following a rise in crude oil prices.

Nestle Japan Ltd. will raise the prices of its 56 varieties of coffee for households by 10-20 percent from January.

Nestle Japan, like other companies that deal in coffee, is at the mercy of the repercussions of the yen’s depreciation as it imports coffee from Brazil and elsewhere.

Many food companies decided they have no option but to raise prices of ordinary food products, such as soy sauce, frozen food, ham and sausages.

The impact of higher prices on consumers is brutal as wages are dropping in real terms from last year’s levels.

The weaker yen is not benefitting Japanese companies as much as before as they have set up manufacturing outposts overseas to bring them closer to local markets.

A study by the industry ministry showed that the share of output by their foreign affiliates rose to 23.4 percent in fiscal 2019, up from 11.8 percent in fiscal 2000.

As a result, the ratio of manufacturers contributing to the value of the Japanese economy is shrinking.

According to a marketing survey this month by Tokyo Shoko Research, 4.9 percent of companies viewed the depreciation of the yen as a positive development, whereas 29.2 percent said the opposite.

The weaker yen had played a major role in the past in luring inbound tourists to Japan.

But it is now hard to predict when tourist numbers will rebound to previous levels, given restrictions on international travel due to the emerging variants of the novel coronavirus.

The depreciation of the yen will likely continue over the coming two to three years, according to Tsuyoshi Ueno, a senior economist at NLI Research Institute.

While the Bank of Japan looks set to stick to large-scale monetary easing, the United States and counties in Europe announced from autumn their policy of scaling back monetary relaxation and raising interest rates.

That will prompt investors to buy currencies with higher interest rates, rather than the yen whose interest rate remains extremely low, analysts say.

(This article was written by Yuji Yamashita, Chihaya Inagaki and Shinya Tokushima.)