Japan: The Current Economy, Politics and Response to the Yen Situation

Its official: after talks of their losing ground in the international competition for second-place in GDP size, Japan has finally become third to the ever-growing China. This article lays out the Japanese politico-economic situation and their next step.

Current Japanese Economy

Japan’s economy has grown only 0.4% in the last quarter, which is trailing behind every one of the six largest industrialized nations; U.K (1.1%), France (0.6%), Germany (2.2%), China and the U.S. (0.6%). This meager growth is one-fifth the averaged estimated growth reports Bloomberg has determined. Though China does not compile quarter-on-quarter reports, its annualized growth was over 10.3% in the last year.

With this global economic contraction affecting the highly-leveraged Japanese economy (currently with over 200% of its GDP consistent of government expenditures), its current deflationary environment has only negatively affected its export-rich economy. Stocks have tumbled as news of the currency against the USD has reached a 15-year high, and continue to surge in the deflationary direction. Some moderately good news is the slowdown in deflation as the Japanese GDP deflator has indicated a drop to 1.6% from above-2%.

This has caused alarm to the Japanese people, who are expecting a reaction from their government. Prime Minister Naoto Kan has indicated that he will not encourage immediate monetary response to this current situation, but will remain in talks with the Finance Minister of the Bank of Japan to see how to assuage this yen situation. Other Yen experts, such as Eisuke “Mr. Yen” Sakakibara says that this situation is more on the US dollar weakening rather than the Yen strengthening. This means it has little to do with the economy policies of Japan and that they should not interfere – that intrusion will only hurt the Japanese.

But companies beg to differ. Japan’s export and outsource-heavy businesses rely on a weaker yen to take advantage of being relatively more cost-effective to its competitors. Companies like Honda, Toyota and Canon net great losses for each point lost in the Dollar’s favor through exchange. This loss can directly translate to cost-cutting practices that may affect domestic operations. (Read: Jobs)

A recent argument for a monetary policy reaction was made by Honda’s Chief Financial Officer Yoichi Hojo who states at the 1:85 USD-JPY rates the profits from net exports do not cover the costs of importing commodities, which can result in fundamental problems with the Japanese economy.

Current Japanese Politics

In order to better understand the next steps Japan will take in response to the Yen depreciation situation, one must first understand the Japanese political atmosphere.

Naoto Kan is Japan’s current Prime Minister, representing the majority political party, the Democratic Party of Japan. The DPJ’s policies are very much akin to the liberal policies in Europe, including his talks of a future tax hike. Kan is the nation’s fifth Prime Minister… in four years.

That’s correct. In the time the US has had one leader – Japan has had five. Reading between the lines, this means that a leader must produce results and fast; or else they will face public retaliation (or worse, condemnation). Kan will face the public as he fights for re-election this September.

Recent Japanese politics is heavily focused on the economy (Sound familiar?). Prime Minister Kan’s previous role as financial minister gives him an experienced view of the Bank of Japan and their options in this situation. Kan most recently appointed Finance Minister Yoshihiko Noda. Finance Minister Noda has full power over monetary policy, and in the past Noda has made clear indications to standby as the yen continues to depreciate.

A lot of the nations’ next move is dependent on the next person in charge as well. With the Prime Minister due for re-election in September, there is a chance the Finance Minister will lose Kan political pressuring, whom has publicly spoken about the benefits of a weaker yen in opposition to Noda.

Japan’s Next Step

I believe the Bank of Japan will cave in and intervene, weakening the Yen. But this will not happen until September.

This business-pleasing policy will occur because of the majority for it and the minority against it. Though the Finance Minister has been very strict in his stance, not only does his Vice Finance Minister Motohisa Ikeda oppose his opinions, but Kan continues to publicly champion the idea of a weaker yen.

Yet, this policy decision will not occur until the Tenken Report, a snapshot of the private economy, in September. Afterwards, Finance Minister Noda can determine whether or not the continued strengthening of the yen is gravely hurting the economy. In addition, should Prime Minister Naoto Kan win his re-election, his clout will further be reinforced in determining the next step in Japan’s future.

Another thing to note: Finance Minister Noda has very recently changed his language. The words he has used before by previous Finance Ministers have historically indicated a swift response in monetary policy to maintain the yen position businesses favor.

Though independent of the government, the BOJ is politically connected to the Japanese government. This means more business-friendly policies as more corporate representation than ever is occurring in Japanese Congress. Businesspeople from companies such as JP Morgan Chase & Co., McKinsey Group, and Citibank Japan have gained the public’s approval to seat and continue to gain popularity for seats in Japanese congress.

Tell me what you think at o.remak@gmail.com, I would love to hear your views.

Thanks to Flickr for the picture.