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What happened to Japan's yen-driven export boom?

Ken Usami | Photographer's Choice RF | Getty Images

When Japan's Prime Minister Shinzo Abe came to power in late 2012, he hoped a weaker yen would give exporters a much-needed boost as well as spur the inflation needed to revive the world's third biggest economy.

Eighteen months on and after an almost 30 percent decline in the yen's value driven by massive monetary stimulus from the Bank of Japan, the currency has failed to lead to the export boom the government had hoped for.

Japan's annual exports declined in May for the first time in 15 months, latest data show. More disturbingly, say economists, is that the yen's decline has failed to boost export volumes, which peaked in 2007 and fell for a third year running in 2013.

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Frederic Neumann, co-head of Asian economic research at HSBC, says the impact of a weaker currency will be felt; it will just take longer than anticipated.

"The Japanese export boost has yet to come. Once Japanese firms have taken the decision that they want to gain foreign export share and start to factor in a weaker yen and build up domestic capacity for expanding production, we will see an impact," he said.

"We think this will happen gradually and exports will start to pick up in the second half. The real kick is only likely to come in 2015/16," Neumann added.

Cautious

Economists cite a number of reasons for why exports, the engine of Japan's economic growth since the country industrialized in the late 19th century, have failed to see a significant boost from the yen's hefty decline against other major currencies.

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One is that Japanese firms have not used the opportunity to aggressively cut their prices and gain market share in overseas markets as they have done during previous episodes of yen weakness.

A study from the Japanese business journal the Nikkei earlier this year showed that in the past, a 20 percent decline in the yen's value may have led to a 17 percent reduction in overseas prices. But this time, the cut has only been about 6 percent.

Japan Inc, in short, has been trying to maximize profits by not cutting prices, analysts say.

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"Companies last year didn't cut their dollar prices, they didn't try to get market share," Neumann explains. "They could have been more aggressive, the reason they weren't is that nobody in Japan believed the yen would stay weak so companies were very slow in adapting."

Global backdrop

Tim Condon, the head of research for Asia at ING Financial Markets, adds that Japan's exporters would struggle even with the weak yen because global demand is weak.

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Exports to the U.S., Japan's biggest export market, fell 2.8 percent in May on-year – the first fall in 17 months.

"We're seeing the slowest world trade growth since 2011, so it would be unrealistic to expect Japan's exports to do well," Condon said.

The yen meanwhile has firmed a touch against the dollar this year and some currency analysts say it will struggle to weaken further.

"The U.S. economy is not growing strong enough to warrant a strong rise in [Treasury] yields and that means dollar/yen will struggle to get to 110 this year," Jonathan Cavenagh, senior FX strategist at Westpac Bank, told CNBC earlier this month.

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The yen was trading at about 101.35 per dollar early Monday.

Inflation

Others point out that a policy of weaker yen was not just about giving exporters a helping hand, but boosting the price of imports to help push Japan out of its deflationary cycle.

"The Abe government's primary goal in depreciating the yen was to make the country's imports more expensive in yen terms, thereby boosting the domestic inflation rate," said Clem Miller, investment strategist, Wilmington Trust Investment Advisors.

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"While yen depreciation made Japanese goods cheaper for foreign buyers, Japanese companies offshore much of their production, so their opportunity to increase export volumes is limited," he added.

The bottom line, say economists is that a weak yen will deliver a helping hand rather than trigger an export boom.

"We still think it's happening it's just happening gradually," said Neumann at HSBC.

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