Strong Yen Belies a Worrisome Japanese Economy. 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. Plaza Accord Carry Trade (A. Japan’s Debt Sustains a Deflationary Depression. Markets have reacted dramatically to the Bank of Japan’s recent efforts to stimulate the economy with loans to high-growth sectors; an expansion of its asset-purchase program; and a new 1 percent inflation target to combat chronic deflation.
Japanese stocks, especially of major exporters, soared and the yen tanked, starting in early February. Yet the spurring effects of monetary easing on Japanese stocks and the depressing influence on the yen didn’t last long. Since mid-March, the currency has resumed its role as a haven from euro-area turmoil. The “risk off” trade is back in favor. Still, I continue to believe that fundamental changes are occurring in Japan that will weaken the yen considerably in future years.
Last year, Japan’s gross government debt was 220 percent of gross domestic product, according to the International Monetary Fund, by far the largest ratio of any Group of Seven country. Ratings Downgrade Wealthy Country The nation is well-educated and dedicated. (A. As Japan Stops Saving, a Crisis Looms. With their declining household-saving rate, Japanese consumers are no longer both financing government deficits and sustaining their nation’s current-account surpluses.
How is the gap being filled? The current-account balance can be expressed as the difference between gross national saving by consumers, business and government, and total gross investment by those sectors. In this context, gross refers to measures before the subtraction of capital consumption or depreciation. If the balance is positive, as in Japan, saving exceeds investment needs and the rest must be exported. If it is negative, as in the U.S., saving is insufficient to finance domestic investment and funds need to be imported. In Japan, household gross saving in excess of gross capital spending is slipping as the saving rate falls. Business Saving Normally, the business sector is a net borrower as capital spending exceeds cash flow from depreciation and retained earnings. Low Rates Domestic Deflation (A. Japan’s Unsustainable Deficit-Financing Model. Financing government debt and deficits hasn’t been a problem for Japan: Until recent years, the country’s big-saving consumers provided the funds to finance the shortfalls.
Unfortunately, this also meant that Japanese consumers weren’t spending that money. In fact, there was so much saving left over that Japan had money to export. This is demonstrated by its trade and current-account surpluses. The Japanese think and act quite differently from Americans. During the deflationary depression of the 1930s, U.S. consumers lacked incomes, with the logical consequence that they didn’t do any spending. During the Japanese deflationary depression that started in the early 1990s, consumers had money, but didn’t spend it. Were they too scared about the future? The dynamic in which the Japanese government’s fiscal stimulus is being saved by consumers and then recycled back to the government to finance its deficit is unsustainable.
Savings Rate Export Slowdown (A. Strong Yen Won’t Survive Japan’s Fiscal Cliff. As its current-account surplus fades into deficit, Japan will be forced to import money at high international rates to finance its government debt. Huge amounts of money creation by the Bank of Japan could temporarily postpone the ensuing debt death spiral. Monetary easing, however, won’t help Japan address the challenges presented by its rapidly aging population, which will result in restraints on consumption that slow growth and increase the cost of government-debt service as a share of gross domestic product.
Furthermore, retirees are consumers, not producers, of goods and services, putting additional strain on those still working to produce enough for their own needs and for the elderly. Yet, uniquely among major countries, Japan has the means to respond to this crisis. The decades of current-account surpluses and the related capital exports have created a huge pile of foreign assets. Capital Imports This idea, however, has two shortcomings.
Export Share (A. The mysterious Japanese economy. There’s been a lot of talk recently about how the debate over European economic problems is mostly playing out in the US blogosphere. But if you really want to see an example of a country cut off from the econ blogosphere, go to Japan. Let’s not forget that until recently Japan was the second largest economy in the world. In this post I’d like to claim that Westerners don’t have a clue as to what is going on in Japan. And I don’t mean “what’s going on” in the sense of why policy is conducted the way it is, we don’t even know the stylized facts about how Japan is doing. For the optimistic scenario, let’s start with a Martin Wolf interview of Paul Krugman: We have already gone straight into the issues. This is interesting, as Japan has had the most contractionary demand-side policy of any country in modern history.
I see two powerful data points that support Krugman; Japan has low unemployment, and their real GDP rose 15% between 1993 and 2011 (or 13% per capita.) PS. Tags: How Japanese Lifestyles and Awareness Changed after the March 11 Great East Japan Earthquake. JFS Newsletter No.111 (November 2011) Eight months have passed since the Great East Japan Earthquake and subsequent tsunami hit the northeastern part of Japan on March 11, 2011, causing the serious accident at the Fukushima Daiichi nuclear power plant owned by Tokyo Electric Power Co. (TEPCO). Some say that the March 11 disaster marked the end of an era, having significantly affected our lifestyles, awareness, and sense of values.
What do the earthquake and the nuclear accident mean to Japan? In which directions will these incidents take the nation? To get more complete answers to these questions we may have to wait for future analyses by historians, but with this article we would like to inform readers of some changes in Japanese lifestyles and awareness, as revealed by various surveys conducted and reported after the March 11 disaster. 'Saving and Generating Energy' Required for Homes Energy Awareness/Action Not a Fad -- Interest Is Beginning to Spread Cooking Methods Have Also Changed. Japan needs European recovery to boost exports | Business. The Japanese news bulletin illustrated the eurozone crisis simply: a giant grey cloud hovering above a map of Europe, where the national flags of Greece, Portugal, Spain and Italy are are adorned with the countries' respective debt burdens.
It is a relevant story here because, in an ideal world, these nations would restructure their debts – while not putting the global economy on a Shinkansen to ruin in the process – and hoover up the exports that will drive Japan's recovery from the earthquake, tsunami and nuclear breakdown in March. However, senior business figures and politicians in the western world also want to see a restructuring here – of the national economy. The governor of the Bank of England has talked of "imbalances" in the global economy this year. Not that our predicament is Japan's fault. This month Vince Cable, the business secretary, told me he had talked about trade imbalances "intensively" on a recent visit to Japan and South Korea.