The dollar dropped to its lowest levels against the yen in more than a decade this month as global investors become more concerned about a U.S. recession. Naomi Martig in Hong Kong reports on how the Japanese economy could react if the dollar continues to weaken, and what it also might mean for other parts of Asia.
In mid-March, the U.S. dollar dropped below 100 yen for the first time in 12 years, and also hit record lows against the euro and other currencies.
The dollar's slide against the yen followed speculation that the U.S. Federal Reserve may not be able to boost the economy and prevent a recession. The dollar is now hovering just under the 100-yen mark, and market analysts say further weakening could hurt Japan.
The United States is Japan's second-largest trade partner, after China, and Japanese exports to the U.S. topped $145 billion last year.
But that number appears to be falling as the dollar weakens and U.S. growth slows. Japanese exports to the United States slid six percent in February from a year earlier, the sixth straight month of decline.
David Mann is chief currency strategist at Standard Chartered Bank in Hong Kong. He says a U.S. recession could hurt Japan's economy, which has been slowing slightly for months, because if the yen continues to strengthen, exports may fall. What is more, the money that Japanese companies earn in the United States will be worth less back home.
"If it's going too quickly than that's something that can be dangerous for exporters where they won't be able to hedge in time and they end up getting far less yen for the foreign currency that they are due to receive," he said.
Mann says Japan will have to look to other parts of the world to make up the loss in exports to the U.S. He says because of that, Japanese officials are keeping a close eye on how the yen fares against other Asian currencies.
"Japan is trading increasingly with other Asian currencies, now that I mention it the trade weighted yen had been going down to multi-decade lows recently. And it doesn't mean that suddenly Japan is not competitive. It is still able to trade with other economies, in particular China, in the region and do relatively well," said Mann.
Japan's trade with the rest of the world is still strong. Exports to Asia saw a nearly six percent increase in February from a month earlier, with shipments to China rising nearly 15 percent, and sales to Europe up around seven percent.
And while the dollar-yen rate has changed significantly in recent months, the yen has not strengthened much against other Asian currencies.
Mann says Japan may also be able to cushion the blow of a U.S. recession because a large part of its economy based on domestic activity, not exports.
If the dollar weakens further against Asian currencies, and the U.S. goes into a recession, other parts of the region are likely to face difficulties. Willem Thorbecke, a senior fellow at the Research Institute of Economy, Trade and Industry in Japan, says Asia's computer and electronics industry will be hit hardest.
"Thirty percent of the sales from Asia ultimately go to the U.S. So if the U.S. slows down it probably would have a corresponding negative effect on Asia. So all of those goods that they've been selling to the U.S. they wouldn't be able to," said Thorbecke.
He says Taiwan particularly faces tougher times if the dollar falls because much of its economy is trade related. The weak dollar also will make U.S. exports cheaper, which could cause problems for countries such as Australia and New Zealand, which compete with the United States on the world market for farm products such as beef and wheat.
And for countries such as Japan that are heavily dependent on imported oil, the dollar's weakness is increasing production costs. The weak dollar contributes to rising oil prices, pushing it to more than $100 a barrel.
Not every economy or industry will suffer equally. South Korea's won has weakened because of fears of a U.S. recession, and that makes its exports cheaper. And many Chinese factories import raw materials and parts that are priced in dollars, which helps offset other rising prices.
Thorbecke says if the U.S. goes into a deep recession, Asia may have to turn to its regional trading partners for continued growth.
"So you want to see Asia pulling back from the U.S., looking for other markets, maybe having some more domestic demand," he said.
Foreign exchange analysts say the dollar is not expected to strengthen significantly anytime soon. And they say that while a U.S. recession does not necessarily mean disaster for Asia, growth in the region is likely to slow down until the U.S. economy improves.