Japanese firms feel the pinch of strong peso

Japanese investors in the Philippines have warned that the strong appreciation of the peso against the US dollar could be negating the gains in the country’s cost competitiveness in the manufacturing sector.

Tomohiro Ando, Investment and Economic Partnership Agreement advisor of the Japan External Trade Organization (JETRO) Manila, raised the foreign exchange factor in the cost competitiveness of the Philippines at the virtual Security Bank’s 2021 Economic Forum: The Future of the Philippine Manufacturing Industry.

Ando noted that the Philippine peso has been appreciating since last year after experiencing a stable rate for the past several years. “The Philippine peso exchange rate has been appreciating against the US dollar by 5 percent and this is another factor that we have to take into account in the shorter term,” said Ando.

Ando, who presented results from Jetro’s latest survey on the competitiveness of Japanese firms operating in the ASEAN region, also related the foreign exchange rate issue to the Philippine labor cost.

According to the Japanese official, the target salary in the Philippines has been “much, much more stable than other countries in Asia,” including that of Vietnam.  

The Jetro survey showed a stable Philippine monthly salary rates for manufacturing workers. From $250 a month in 2011, the salary rate has remained stable up to 2020 at a level of $260.

Comparatively, Vietnam’s salary rate skyrocketed from only a little above the $100 level in 2011 to already $250 as of 2020, almost at the level of the Philippines’.

He added that while the labor cost in the Philippines has remained almost unchanged since 2010, Japanese firms, on their own, have been raising the salary rates of their Filipino workers by around 5 percent annually.

Ando further explained that even if the Japanese firms spend for higher salary rates to their Filipino workers, this was offset by the stable foreign exchange rate in the country.

But with the appreciating domestic currency against the US dollar since last year, Ando hinted this could negate the competitiveness gains of the country. He urged the government to consider its impact on manufacturing firms, which import most of their raw materials.

The peso climbed to P47.80 against the US dollar at the closing of trade last Friday.

Ando raised the forex factor as the domestic manufacturing sector, which accounts for 20 percent of the country’s GDP, is expected to sustain its growth momentum being the most cost competitive among peers in Asia.

In the same presentation, Ando showed a table on manufacturing cost comparison from a JETRO survey among Japanese manufacturing firms operating outside of Japan wherein the Philippines consistently ranked highest among neighboring country competitors in the manufacturing sector. 

“Almost every year in the past ten years, the Philippines has been the most competitive among these countries in the table,” said Ando pointing to the table in the survey. 

The Philippines, however, placed second to Vietnam in 2020 after losing 2.2 notches. 

“In short, and we have to pay attention to this fact that, in general, Philippine has been competitive, even in cost competitive in this way,” he said.