Talking up yen vs euro seen costing Japan little

TOKYO, Sep 25 (Reuters) Japan's willingness to let the yen rise against the euro makes perfect economic sense as it allows Tokyo to please European counterparts at very little cost, with the nation now less reliant on export growth, economists say.

With half Japan's total exports now shipped to Asia and with trade settled predominantly in dollars, a yen rise against the euro would not hurt Japan's export industry much, they say.

''It's true that the yen's fall against the euro helped lift corporate profits to some extent,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Securities.

''But in the end what matters most (for Japanese firms) is how the U.S. economy performs, since Europe does not carry a large weight in Japan's trade with the rest of the world,'' he said.

Shipments to the European Union make up about 15 percent of total Japanese exports, against nearly 50 percent to Asia and 23 percent to the United States, according to the Ministry of Finance's trade balance data.

Japan has seemingly gone along with European efforts to talk up the yen, with Finance Minister Sadakazu Tanigaki saying after the Group of Seven rich nations' meeting earlier this month that the yen's drop to record lows against the euro in late August had been a bit ''wild''.

The remark suggests that Tokyo sees the yen's tumble against the euro as overdone, and that it will allow the yen to rise as long as it does not lead to sharp yen gains against the dollar.

Behind the Japanese government's tolerance of a yen rise is confidence that strength in the corporate sector has spread to households sufficiently to make the economy resilient to external shocks.

LUXURY BRANDS In fact, a weaker euro against the yen could bode well for private consumption since it would make luxury European brand items, still very popular in Japan, more affordable to consumers.

Personal consumption makes up about 55 percent of Japan's GDP.

''A yen rise against the euro would be somewhat negative for exports but positive for personal consumption,'' said Takahide Kiuchi, a senior economist at Nomura Securities.

''Taken together, the negative impact on the economy is very small,'' he said.

The yen's effective exchange rate, or the trade-weighted value adjusted for inflation, has been hovering at a 21-year low, partly on receding expectations of any further interest rate rise by the Bank of Japan in the near term.

The dollar was around 116.60 yen on Monday, largely unchanged from levels at the start of this year, after bouncing back from a fall below 110 yen in May.

The euro started this year below 140 yen but gradually rose to hit a lifetime high near 150.75 yen on Aug. 31. It now stands around 149 yen Nomura Securities estimates that for each 10 yen of falls against the euro the total profits at big Japanese firms rise by around 2 percent.

The same amount of yen falls against the dollar would have a three times higher impact, Nomura says, indicating that the dollar's performance means much more to big-name Japanese exporters than that of the euro.

SIGNS OF PEAKING Despite coming off its lifetime high near 150.75 yen marked on Aug. 31, the euro is still at a much higher level than would hurt Japanese companies' bottom lines.

Toyota Motor Corp., Fuji Photo Film Co. and Sharp Corp. have all set their average euro/yen forecasts for the fiscal year ending next March 31 at 135 yen, much lower than current levels around 148 yen, according to a survey conducted by Reuters on Aug. 28-29.

Some analysts, however, caution against underestimating the negative impact of euro/yen weakness, particularly as exports and capital spending are already showing signs of peaking.

Of total exports to the European Union last fiscal year, over 70 percent were shipments of automobiles and electric machinery, which benefit from a weaker yen.

If the yen rises sharply against the euro, those companies might need to scale back some of their upbeat projections for European sales.

While the implication may be far less serious than a sharp yen rise against the dollar, coupled with a slowing U.S. economy, a euro/yen fall may gradually dampen exports and production.

''There is already concern that inventories are building up in the information-technology sector,'' said Toshihiro Nagahama, a senior economist at Dai-ichi Life Research Institute.

''If the euro/yen turns down sharply, it may take longer than expected for the IT-inventory adjustment to end and therefore could hurt the economy in the long run,'' he said.

REUTERS SBA ND1548