Op-Ed

FOREX INTELLEGENCE: The Japanese Yen is Running in the Wrong Direction

Thursday, July 21, 2011

By Anthony Rowley

Tokyo- (PanOrient News) In what is becoming a 'race to the bottom' among the world's leading currencies, the yen is a clear loser in more senses than one. It is running in the wrong direction - appreciating while others are depreciating - just at a time when Japan both needs and 'deserves' a weaker currency.

The yen should by rights be leading the field in the depreciation stakes. Triple disasters have damaged Japan's exports and sent the nation's current account into deficit in recent months while the nation's economic outlook is clouded by problems that look like persisting for some for time.

All this poses major problems for Japan because with domestic demand and confidence both at lows in the wake of the March 11 earthquake, tsunami and nuclear crisis, exports appear to represent the only way out of a hole. Yet the yen seems doomed to continue appreciating in the foreseeable future

Even in the unlikely event that Japan could persuade its G7 partners to join concerted yen-weakening foreign exchange market intervention of the kind launched in the immediate aftermath of the March 11 calamities the beneficial impact would now, as then, almost certainly be very short-lived.

The problem is that the dollar is in trouble, as is the euro. They share a common lack of credibility, even if for different reasons. Thus even though Japan's problems are at least as serious as those of the US and Europe that still does not make the yen look like a relatively bad bet.

In fact, like the Swiss franc (and, of course gold) , the yen is being seen as a safe haven now in the light of the continuing political deadlock in Washington over how to solve the US budget problem; the possibility of further quantitative easing, and the threat of renewed economic slowdown.

Normally, investors would turn to the euro as a refuge from a weak dollar but with the threat of forced debt reduction to stave off default among peripheral European nations still perceived to be very real, there is little to attract anyone to the European common currency at this time.

All this means that Japan is faced with the prospect of continuing yen strength and it must find ways to cope with that situation. Fiscal stimulus is out of the question. Outstanding government debt is near 200% of GDP and any increase in tax revenues must be applied to covering social security shortfalls.

This throws the onus on the Bank of Japan to apply further stimulus to the economy, however much the central bank may object. Even if Japanese consumers cannot be induced to consume or businessmen to invest in their currently demoralised state, monetary easing should at least weaken the yen.

A weaker yen would help to boost Japan's exports, especially against those of direct competitors such as South Korea, at this critical point in time when Japan needs to recover from the shock administered by natural disasters and when business confidence is still at a relatively low ebb.

A weaker yen would also help to counter Japan's chronic deflation (which has been exacerbated by the post-March 11 slump in domestic demand) by raising import prices and thus boosting inflation expectations, once these higher prices feed through into the consumer price index.

The Bank of Japan has a reputation of being ultra-cautious and its governor, Masaaki Shirakawa, is cynical about the benefits of US Federal Reserve-style monetary easing. But the situation in Japan, where inflation dangers are minimal is very different to that in the United States.

British-style austerity is closer to the heart of Mr. Shirakawa than (US Fed chairman) Ben Bernanke-style monetary largesse. But Britain's economy has not been traumatized in the way that Japan's has and is better able to withstand an experiment with austerity policies.

In the longer-run, however, yen depreciation will not solve Japan's economic problems because the improved competitiveness this would offer in markets such as the US and Europe will be offset in future by the declining purchasing power of consumers in these markets.

The markets of the future for Japan will be found increasingly not in the West nor at home in Japan where a declining population is already becoming a barrier to increased sales. They will be found instead on Japan's doorstep in China and other parts of Asia.

In order to better penetrate those markets, Japan need more than yen weakening (enyasu).It needs to focus on signing investment and free trade agreements with its East Asian partners so that barriers to trade than go well beyond price factors can be addressed. That is the only way forward.

Anthony Rowley is a long-standing expert on East Asian economic and financial affairs, resident in Tokyo

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