Nissan, the nation’s third-biggest carmaker, can’t afford to rely on exchange rates to compete, Chief Executive Officer Carlos Ghosn says. Canon Chairman Fujio Mitarai, head of the country’s largest business lobby, and Ricoh President Masamitsu Sakurai, leader of the biggest executive group, said the yen’s drop is becoming a concern.

While the yen’s 10 percent decline against the dollar and 20 percent plunge versus the euro in the past two years helped the Tokyo-based companies post record earnings, it’s also pushed up import costs that may cut into profits and sparked criticism from trading partners.

“Honestly, the yen is too cheap,” said Michijiro Kikawa, chief executive officer of Hitachi Construction Machinery Co., which competes with Peoria, Illinois-based Caterpillar Inc. in selling mining equipment. “There will be trade friction should the yen fall further.”

The yen slid to a 4 1/2-year low of 124.13 against the dollar and a record low of 166.94 against the euro on June 22 as hedge funds and Japanese pensioners borrowed and sold the currency to purchase higher-yielding assets in so-called carry trades. It reached the lowest since 1985 against currencies of major trading partners in May, according to the real effective exchange rate compiled by the Bank of Japan.

Japan’s currency rebounded last week, gaining 0.6 percent against the dollar to 123.17 and 0.04 percent against the euro to 166.80 after Minister of Finance Koji Omi told reporters on June 26 such “one-way bets” are risky. It traded at 123.80 per dollar and 166.21 against the euro at 7:48 a.m. in London.

The yen’s drop increases import costs for exporters and consumers, Canon’s Mitarai, head of the Keidanren business lobby, said at a press conference on June 25. Japan relies on imports for almost all of its energy needs.

Producer prices rose 2.2 percent in May from a year earlier, the 39th month of increases, while consumer prices excluding food fell 0.1 percent, the fourth straight month of declines. That suggests companies can’t pass higher costs to customers.

Mitsubishi Electric Corp., a Tokyo-based maker of robots, factory machinery and mobile phones, on April 27 said operating profit will drop for the first time in six years because of rising oil, copper and aluminum prices. Tokyo-based Mitsukoshi Ltd., Japan’s third-largest department store chain, cut its annual earnings forecast in February after prices for some European imports rose by “10 to 20 percent, if not more,” said spokesman Masaki Shimizu.

“There’s always a fundamental concern about prolonged, excessive yen undervaluation,” said Toyoo Gyohten, the top currency official at the Ministry of Finance from 1986 to 1989 and now president of the Institute of International Monetary Affairs in Tokyo. “The economy would be too dependant on external demand and trade friction is a potential risk.”

The yen’s drop may have exceeded the expectations of Japan’s large manufacturers, who predict it will average 114.40 per dollar in the year ending March 31, according to the Bank of Japan’s Tankan business survey for June, compared with an estimate of 114.32 in a March survey.

The Tankan’s confidence index was unchanged at 23, near a two-year high of 25 and matching the median estimate of 26 economists in a Bloomberg News survey.

Hitachi Construction may exceed its target for 1 trillion yen (US$8.1 billion) in sales two years earlier than forecast as the yen’s drop boosts the value of its exports, Kikawa said.

Canon, Japan’s biggest maker of office equipment ahead of Ricoh, forecasts an 11 percent increase in 2007 net income to 505 billion yen.

Nissan’s Ghosn says the currency advantage creates risks because exporters have less incentive to cut costs and develop new products.

“If people get used to a weak yen, competitiveness can be lost,” Ghosn said in a June 24 interview in Singapore. “I will not make any forecast because I have no clue where the yen is going.”

Nissan predicts a 4 percent gain in profits to 480 billion yen in the year started April 1, following its first profit decline in seven years.

Toyota City-based Toyota Motor Corp., which surpassed General Motors Corp. of Detroit in first-quarter sales of cars and trucks, is spending more this year lobbying U.S. lawmakers. Democratic Representative John Dingell of Michigan, GM’s home state, said May 9 that Toyota’s profits got a US$250 million boost from a cheap yen and Congress is “losing patience” with nations keeping their currencies artificially low.

“Companies and the government know friction with the U.S. can come up at any time,” said Martin Schulz, senior economist at Fujitsu Research Institute, a unit of Tokyo-based Fujitsu Ltd., Japan’s second-biggest maker of personal computers. “Japanese companies are in a sweet spot” and don’t want to see a further currency decline, he said.

Some traders say the carry trade has thrown the currency out of line with Japan’s economy, which grew at a 3.3 percent pace in the first quarter. When the carry trade collapsed in 1998 following Russia’s debt default, the yen jumped 10 percent against the dollar in two days and ended the year 15 percent higher.

Japan’s gross domestic product contracted 2 percent, reversing a 1.6 percent expansion in 1997. Ricoh’s Sakurai, head of the Japan Association of Corporate Executives, said on June 19 he is wary of a similar “sharp unwind.”

To curb bets against the yen, Bank of Japan Governor Toshihiko Fukui may increase the benchmark lending rate to 0.75 percent in August, according to 14 of 31 economists surveyed by Bloomberg.

Minister of Finance Omi on June 26 criticized “disorderly moves” in the yen. Japan last sold yen in the first quarter of 2004, buying 14.8 trillion yen in foreign exchange as the currency reached 103.42 per dollar. It last bought yen in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.

“The yen’s excessive weakness could lead to instability,” Nobuo Yamaguchi, head of the Japan Chamber of Commerce and Industry and chairman of Tokyo-based Asahi Kasei Corp., a petrochemicals company, said June 20. “One possible response would be yen-buying intervention.”

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