It is easy to dismiss the conundrum in the Japanese Yen market over the past few days as a typical Japanese political bantering among cabinet ministers to put up a show for the influential Japanese conglomerates. In my opinion, the matter does have far reaching consequences and not a laughing matter. The Japanese politicians and businessmen do have a valid case.
Cause and effect mixed up
The crux of the issue is this – the JPY’s weakness is the “result” of chronic current account deterioration and not the “cure” for the current account deterioration. So the direction of causality between the country’s crumbling current account surplus and the JPY weakness in the aftermath of 2008 has been confused by market participants. If A (JPY weakness) is a result and not the cure for B (current account deteterioration), then the risk for A to enter a free fall is large if people have misunderstood it to be the “cure” for B.
On the surface, the arguments put forth by the ministry and the chamber almost sounded like they want Japan to save the world – i.e. lead the global rebalancing act to drive the country’s current account surplus into deficits. The conglomerates as represented by the Chamber of Commerce are urging the government to put an end to the yen’s weakness. In my relatively long history of watching Japan, I don’t recall any instance when the Japanese chamber had asked for a stronger JPY – it was always the opposite. At best, they would say “arigato” to signal they were happy after a successful official intervention to weaken theJPY but never to call for a reversal. The reasoning they put forth was that the country’s industrial structure has already been transformed to become less export-dependent and more outward investment-focused, which meant that they need a stronger JPY to keep import bills low, boost the JPY’s power to invest overseas and ultimately, reduce imported inflation. Yes, they did use the word “inflation” at this juncture when the entire CPI series out from this country – from headline to core, nation-wide to Tokyo alone – puts inflation rates at sub-0.
The reality, in my opinion, is that the current account surplus is already on the way to deficits, without the efforts of a strong JPY. And the underlying driver is ageing. There is no need to accelerate the move through a strong JPY. The job of global rebalancing is best left to someone else, someone younger to put it mildly.
No wonder no one believes them. While the Yen’s 15% loss against the Dollar was within the compressed past 3-4 month period, the currency remains about 35% stronger against USD and EUR from its pre-Lehman crisis levels. So the Yen is still relatively strong. Being the weakest of the G3 on the growth-inflation cycle at this current juncture, suddenly the Japanese authorities and the chamber might find it a struggle to fight against the weak JPY tide now that it has started. To further confuse market, the cabinet secretary came out a day after the separate statements from the commerce chamber and economic minister to debunk the views, claiming that the JPY correction has to continue and the government is not seeking to reverse course or confuse the markets. Today, Day Three of the whole episode, the economics minister expressed his regrets over his Yen remarks two days ago and that they had been misinterpreted.
The great debate for Japan is this. The country’s current account surplus has spiralled downwards in the aftermath of 2008. Some predicted that the country will go into a chronic deficit five years down the road. Aggravating the situation is the shutdown on 53 nuclear production plants which drove up the imports of costly energy. On the export side, the loss in competitiveness has already turned the country’s surpluses with China and the EU into deficits last year. Japan is still holding up its surpluses intact with the US and the rest of Asia.
Ageing = falling savings ratio = current account deficit = currency devaluation risk
By definition, ageing lowers a country’s savings ratio – and Japan’s saving ratio has been falling for more than a decade, fortunately coming from very high levels. But it is probably close to the point that the nation as a whole will soon have to start dissaving. Dissaving leads to current account deficits. To fight the tide will be tough, without some form of revolutionary boost to productivity to make up for the ageing. Even efforts to invest outwards could gradually become a struggle. Interestingly, in the latest spate, the strong voices coming from the home front were not only those of the domestic conglomerates. Multinationals especially from the consumer and health care sectors are crying out for a reversal of a weak JPY that is eroding into their profit lines. Will they start to pull out of this market, depriving of the ageing Japanese consumers of imported goods?
It’s between a rock and a hard place. I think Japan is better off running a weak JPY now, gradually accept ageing but steer clear of entering into current account deficits which means they do need to draw a hard line in the sand at some levels which the industry leaders have now put at 100 for USDJPY. And I thought this is a country that produces SKII and other anti-ageing miracle cures?