June 4, 2012
Strong Yen Belies a Worrisome Japanese Economy
By A. Gary Shilling Jun 3, 2012 6:01 PM ET
Bloomberg.com
Investors have enough to worry about: the crisis in the euro area, the uneven U.S. recovery and the probable hard landing in China. So I hate to be the bearer of more worrisome tidings: They also need to start keeping a watchful eye on Japan.
The world’s third-largest economy has been in a deflationary depression for two decades, with very low, if not negative, gross-domestic-product growth, and deflation more often than inflation. True, first-quarter GDP rose 4.1 percent at annual rates after a flat reading in the fourth quarter of 2011. The strong showing is largely attributed to increased domestic demand due to government spending and incentives to help the country recover from the March 2011 earthquake and tsunami, and similar rates of growth aren’t expected in coming quarters. The first-quarter GDP deflator, a key price indicator, rose 0.02 percent, its first increase in more than three years. Prices, excluding food and energy, fell 0.3 percent in April.
Given this 20-year deflationary depression, the yen’s enduring strength against the dollar and other major currencies is a mystery.
It takes about 78 yen to buy $1 today. In 1985, it took about 250 yen. That was the year the U.S., France, Germany, the U.K. and Japan met in New York and reached what became known as the Plaza Accord. The agreement was aimed at strengthening the yen and weakening the U.S. dollar as a way to curb Japan’s export juggernaut. Nevertheless, the Bank of Japan flooded the economy with cheap money in order to offset the depressing effects of a stronger yen.
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The yen has maintained its strength for several reasons. First, Japan has pursued a mercantilist foreign-trade policy that recalls France in the 17th century. Exports have been promoted by the government-industrial complex known abroad as Japan Inc., with a concentration on cars, electronics and other industries designated for global dominance. Meanwhile, imports have been discouraged. A government official once proposed banning the importation of U.S. skis on the grounds that they hadn’t been tested on Japanese snow. And so, until recent years, the trade surplus persisted. The yen also has been buoyed by the steady repatriation of earnings and the money inflow to Japan’s immense holding of foreign assets.
Second, investors have viewed Japan as a haven during periods of turmoil, including the 1997-1998 Asian debt crisis, the 1990s dot-com bubble and its 2000-2002 collapse, the U.S. subprime-mortgage boom and meltdown, the global recession that followed in 2008-2009 and, most recently, the European sovereign-debt crisis.
Third, investors are well aware that repeated Japanese currency interventions designed to curtail the yen’s strength haven’t worked for long. In early May, officials threatened to step in again to hold down the currency but didn’t take any action at the central bank’s May 23 policy meeting. The yen jumped. True, the government hasn’t usually been joined by the U.S. and other major countries in trashing the yen, though the Japanese central bank has asked the country’s major banks if they could help it intervene overseas during European and North American trading hours.
More: http://www.bloomberg.com/news/2012-06-03/strong-yen-belies-a-worrisome-japanese-economy.html
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