It’s the economy that cried wolf.
With growth slowing, deflation deepening, and the yen inexplicably surging in late August, Japanese policymakers pledged bold action. Bank of Japan governor Masaaki Shirakawa rushed home from Jackson Hole, Wyoming, to deal with the emergency.
Investors braced for aggressive currency intervention. The media mobilized on 30 August to cover Prime Minister Naoto Kan unveiling a fat stimulus package to counter the export-crimping effects of a strong yen. And then—nothing.
Disappointment over token efforts resulted in exactly what Japan didn’t want: an even stronger yen, which has gone from 85.2 to the greenback on 23 August to 84.1 on 31 August. Suzuki Motor Corp. chairman Osamu Suzuki, who has built a big export business for his company’s sturdy little cars, speaks for many when he says of the currency: “I spend every day feeling anxious about this.”
So do politicians in Tokyo. That they are at a loss to do anything about it has Japan suffering the same fate as Aesop’s boy who warned of crisis so often that no one took him seriously anymore.
As the dollar and euro slide, the yen rises by default. Rarely before has it been so difficult for Japan to control its currency— yet the yen is the national problem that policymakers, Japanese executives, and ordinary Japanese obsess about the most. The yen’s jump to a 15-year high says much about where Japan finds itself in 2010, and that’s not a good place.
Here are three specific things to consider about Japan’s plight:
One, the price of Japan’s aversion to change is going up. After the boom-and-bust 1980s, it should have rid banks of bad loans, deregulated industry, made tax policies more pro- business, raised productivity and encouraged entrepreneur- ship. If Japan had done all these things, it would have a much better balanced economy today, and the yen’s value wouldn’t matter nearly so much. Instead, Japan opted for Band-Aids like massive government spending, low interest rates, and a weaker yen.
Exchange rates became a particular obsession in the 2000s as Japan focused on its export behemoths to maintain a trade surplus, the only strategy the government knew how to pursue. To their great surprise, Japanese policymakers discovered that the currencies of nations that export more than they import go up—especially in crisis-wracked times, when investors seek safety.
Now, thanks to the glacial pace of change, Japan’s relevance globally is waning. China’s economy officially surpassed Japan’s in size in August.
The moral of this story? Don’t cry about the strong yen; fix the problem, says Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd in Tokyo.
Second point: Japan is being overwhelmed by international forces. At play are global trends far beyond the reach of bureaucrats in Tokyo. Yet its post-War business model worked so brilliantly that the corporate elite, even to this day, is reluctant to change. Ditto for a government that remains wary of immigration and empowering women to offset a rapidly aging workforce.
This delicately calibrated status quo is getting harder to maintain with each passing day. Trade surplus aside, there’s little economic justification for the yen’s 28% jump against the dollar since 1 September 2008.
Japan didn’t fix its leaky roofs when the sun was shining prior to the 2008 collapse of Lehman Brothers Holdings Inc. Now that the world economy is raining bad news, it’s paying the price. So are the nation’s 126 million people and investors who bought into a revival that was more hype than reality.
The third point is that political paralysis is taking its toll. There’s a reason currency traders aren’t living in fear that the Bank of Japan will sell yen: The nation’s policymaking apparatus is more uncoordinated than ever.
Part of the problem is that Japan can’t seem to hang on to a leader: Should a 14 September election go badly for Kan, Japan could have its sixth prime minister in three years.
Twenty years after the bursting of the bubble, it would be nice if we had, if not a plan, at least a sense of urgency, says Nicholas Smith, director of equity research at MF Global FXA Securities Ltd in Tokyo. And a leader that stayed long enough for the outside world to learn his name.
This leadership vacuum feeds deflation. In July, consumer prices excluding fresh food fell for a 17th consecutive month. The smartest way to persuade consumers to save less and spend more is to convince them the future is bright. That goes for businesses, too.
Such optimism is in short supply. Suzuki, for one, is speaking out with greater frequency—and greater pessimism—these days. I want Tokyo to hear our wailing, he says. Oh, policymakers do. It’s just that they have been doing their own fair share of crying—even as the world passes Japan by.