Why Japan Is Yearning For A Weaker Yen

Lisa Smith, BA (Hons), CeFA

Japan has plunged back in to recession and experts predict the nation’s economic prospects are disappointing for a once great world trade power.

Adjusted figures for December show the  economy has contracted for two consecutive quarters.

Japan is still the world’s third biggest economy, but last year saw exports to China and Europe collapse as the global downturn continued to bite.

Japan has also seen demand for vehicles fall at home and abroad and the boost from post-tsunami infrastructure spending is no longer having a positive financial impact.

Other issues highlighted in a report by Credit Suisse are falling industrial production and deflation.

At 240%, Japan has the world’s highest debt-to-GDP ratio, which has led to severe public spending cuts. Put simply, Japan’s debt is nearly two-and-a-half times the size of the nation’s economy.

Pledge to spend trillions

This precarious situation was highlighted by the International Monetary Fund (IMF), which pointed out that the debt would quickly become unsustainable should government bond yields rise quickly.

Such a move would create market uncertainty about Japan’s solvency – and could have ramifications for the global economy.

Hopes are high that the new  Liberal Democrat government that took power in December 2012  will act on an election  pledge to pend trillions to boost the economy and lower the yen’s value to help exporters.

Without action, Japan will see foreign investors lose confidence in the economy and call for bond yields to rise, which is likely to destabilise the country’s banks.

That’s because the banks have around 25% of their assets in sovereign debt. Increasing interest rates would hit bond values which, in turn, would lead to massive losses.

Disappointing economy

Japan’s bid to loosen financial policies to ward off disaster may not boost the failing economy, according to Credit Suisse.

In their report, they say: “Our analysis shows that GDP is only likely to  rise 1%  over two years. A fiscal stimulus of at least £350 billion which would grow GDP by 1.6% is needed. Together with a looser fiscal policy, this could  boost Japan’s GDP by 2%.

“Also, a weak yen would help exporters against a slump in domestic demand if interest rates rose sharply.”

Some analysts fear that revising monetary policy is too little, too late  to help the country’s economy.

As Credit Suisse pointed out: “Of all the major economies of the world, Japan’s looks to be the most disappointing.”

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