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Is Japan betting its future on a new weak yen policy?
01/07/2010 1:22 pm EST
On his first day in office new Japanese Finance Minister Naoto Kan lost no time in saying that he’d like a weaker yen. The Japanese currency is already down 9% from its November high of 84.83 yen to the U.S. dollar but it’s still 18% higher than two years ago.
That has killed Japanese exports—since a stronger yen makes Japanese products more expensive to overseas customers—especially since China has re-pegged its currency to a declining dollar. That’s had the result of making Chinese exports cheaper even as the Chinese economy has led the world out of recession.
The yen fell on the Finance Minister’s remarks in his first press conference. It was down about 1% against the U.S. dollar as of noon in New York.
Kan’s preference for a weaker yen reverses the policy of his predecessor Hirohisa Fuji who after taking office in September repeatedly said he favored a stronger yen as a way to bolster the spending power of Japanese families. Fujii famously called the notion that a weaker yen would help Japanese exporters absurd.” Fujii stepped down recently because of persistent health problems.
Exports led Japan’s recovery from its worst postwar recession, accounting for almost all of the 1.3% growth in Japanese GDP in the third quarter of 2009. Recently though Japan’s big exporters have shown signs of pulling back on capital spending. The most recent Tankan survey from the Bank of Japan reported that these companies plan to cut capital investment by almost 14% in the year that ends in March 2010. That’s the second worst projection in the history of the survey.
Japan’s consumers have shown little interest in picking up the slack. Retail sales, for example, have declined for 15 straight months. (For more on how the huge gamble by Japan’s Democratic Party government to revive consumer spending see my post http://jubakpicks.com/2010/01/04/japans-huge-budget-gamble-will-push-up-global-interest-rates/ )
Two problems with Kan’s weak yen policy that I can see.
First, Japan is a latecomer to the weak-currency-to-expand-exports strategy. The United States, the United Kingdom, and most importantly China are all pursuing this strategy as a way to revive growth. Japan might be able to limit the damage to its exporters by letting the yen weaken but it’s hard to see how everyone now playing this currency game can increase exports when the global economy is still struggling back from a near recession. (It was a full scale recession in developed economies.)
Second, it’s hard to put the weak-yen genii back in the bottle once you’ve let it out. Japan hasn’t intervened in currency markets to keep the yen from appreciating since the first three months of 2004. Investors are already assuming that a Kan-led finance ministry will intervene any time the yen threatens to fall below 90 to the dollar again.
The danger here is that a weak yen, one with just about chance of significant appreciation and with a significant chance of getting less valuable, will mean investors will demand higher interest rates. That’s a huge risk for a government overseeing a budget that projects spending twice as much in fiscal 2011 as it takes in from taxes. Japan’s total debt is projected to hit 181% of GDP by March 2011. That’s far and away the highest debt load as a percentage of GDP anywhere in the developed world.
Despite that huge debt load, Japan will pay less in interest in the 2011 fiscal year than it paid in 1986 when the debt load was only one-quarter as large. That’s because Japan’s near 0% interest rates make funding Japans debt cheap.
Doing anything that threatens those low rates courts potential disaster. Fujii, an old hand who was finance minister back in 1993, understood that it was essential to keep the confidence of domestic and international lenders. Kan, who was health minister in 1996, and more recently deputy premier, so far seems to be playing to a different audience.
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