JAPAN AND THE 2008-2009 GLOBAL ECONOMIC CRISIS: HARDSHIPS, STIMULUS COUPON AND STRONG YEN

JAPAN AND THE GLOBAL ECONOMIC CRISIS IN 2008 AND 2009

The global financial crisis in 2008 and 2009 hit Japan hard as it did with all major industrialized countries. The Tokyo stock market crashed as did major stock markets all over the world.. The Nikkei and Topix indexes recorded record one day falls, declines over four percent in one day on several occasions, and dropped below important markers.

The global financial crisis in began in the United States with trouble in the housing market as people became unable to pay back their subprime loans in the summer of 2007 and peaked with collapse of Lehman Brothers security firm in September 2008. Many saw similarities between the U.S. crisis and the breakdown of the Japanese economy after the collapse of bubble market in the early 1990s.

The euro and the U.S. dollar went into a free fall against the yen, with the dollar dropping and staying well below the 100 yen mark and the euro drop from around ¥160 to below ¥125 in a couple of weeks. The yen began 2008 at 109 to the dollar. It fell to 95 to the dollar in March after the collapse of Bear Stearns and crashed again to 87 after the Lehman Brothers collapse. The yen rose 38 to the Euro in 2008.

The government and the Bank of Japan hold $74.5 billion in debt issued by Fannie Mae and Freddie Mac, two of the largest housing loan providers in the United States. Claims by Japanese banks and security firms against Lehman Brothers totaled in the billions of dollars.

The Japanese economy shrunk 3.3 percent in fiscal 2008 (between April 2008 and March 2009) The trade deficit hit ¥223 billion in November 2008 and reached a record ¥952.6 billion in January 2009. In February 2009, the IMF said that Japan was in “deep recession.” GDP declined 12.1 percent in the October to December quarter in 2008, the biggest contraction in Japan since 1974 when it was in the midst of oil crisis, and crashed 14.2 percent in the January to March 2009 quarter, the steepest fall on record. Despite some growth at the end of the year overall the economy shrunk by 5.4 percent in 2009. Unemployment rate rose to a high of 5.7 percent in August 2009.

Good Websites and Sources on Economics: Ministry of Economy, Trade and Industry meti.go.jp/english ; Ministry of Finance of Japan mof.go.jp/english ; Japan Economy News and Blog japaneconomynews.com ; Japan Economy Watch japanjapan.blogspot.com ; Japan Center for Economic Research jcer.or.jp/eng ; Japan Inc. Economic and Business News japaninc.com ; Google E-Book: Japan in the 21st Century, Environment, Economy and Society (2005) books.google.com/books

Stock Market Fall in Economic Crisis in 2008

The Nikkei stood at 15,307 at the end of 2007 and fell to 6,448 in 2008, a fall of 42.1 percent, the biggest ever percentage fall in a single year and worse than other stock markets around the globe. The Dow Jones fell 36 percent; the London FTSE, 33.1 percent.

The Nikkei lost early half its value in10 months, plunging from above almost 16,000 in December 2007 to below 8,000 in October 2008, when at one point it hit 7,162.90, it lowest point in 26 years. Topix fell from above 1,500 to below 750 in the same period, hitting 746.46 it lowest point in 24 years. Overall the Nikkei suffered a record 42 percent decline in 2008 and reached another 26-year low when it fell to 7,086 in March 2009.

The main cause of the dramatic drop was the exodus of foreign investment which had accounted for 60 percent of the trading volume on Japan’s stock market in recent years. Hedge funds were behind some of the stock falls as they sold off stock after the Lehman Brothers collapse to accumulate cash. Pension funds and financial institutions were also engaged in large scale sell offs. Shocked by the plummeting prices the Japanese government introduced bans on some types of short selling.

The decline of blue-chip companies like Toyota and Sony was most striking. In the past they had survived domestic slowdowns with string overseas sales but this time those overseas sales dried up.

Results of Economic Crisis in Japan in 2008

Exports plunged almost 50 percent in February 2009 as demand for Japanese cars and electronics plunged. It was the biggest decline since the government began keeping records of such things in 1980. Exports dropped a record 16.4 percent for the year and Japan trade balanced plunged to a deficit of $7.25 billion in fiscal 2008.

The global slowdown decreased demand for Japanese products and the high value of the yen made these products more expensive than they were before, decreasing demand further. Consumer spending and exports---both cornerstones of the Japanese economy---declined. Certain regions and sectors’such as those associated with the automobile industry---were particularly hard hit.

Business and consumer confidence reached its lowest level in 34 years.Unemployment reached 4.4 percent in December 2008 and 4.8 percent in March 2009 and 5.2 percent in May 2009. The May ratio of jobs to job seekers of 9.44 was the lowest since data for that figure started being collected in 1963.

The good points to the strong yen and dropping prices for oil, food stuffs and resources---cheaper goods, lower prices for food, gasoline and raw materials---were outweighed by the sudden drop of demand caused the poor condition of the global economy and worries about the future.

There were worries that Japan would return to the era of stagnation and deflation. Small exporters were hit particularly hard. Some of them saw their orders decline by 40 percent. With nothing better to do employees spent much of their time cleaning sweeping the floors and cleaning machines.

Those Hit by Economic crisis in 2008 and 2009

Small factories were particularly hard hit. Some saddled with large loans for factory real estate and machines and large payroll saw their order shrink to near zero. Some owners had to dip into to family savings for weddings and college education to come up with cash. Some took out yet more loans and cut back on food expenses. Other went bankrupt,

Exporters were also hit hard. Yasuo Yamamoto of Mizuho Research Institute told the New York Times, “Japan has taken a disproportionate hit in the economic downturn. Japan’s exports are concentrated in the very sectors that had been hit the most in the economic crisis, like cars and electronics.”

People began lining up outside job centers in the wee hours of the morning. Shrines known for bringing business prosperity were filled with men in suits. Students feeling the pinch cut back on food. Thousands of graduates had job offers taken back. Applications for welfare shot up, particularly from mon regular workers.

Effects of the Economic Crisis in 2008 on Temporary Workers

Many of those who lost their jobs were nonregular, temporary or part time workers who were let go aid off after their contracts were finished or even before then. In some cases these workers lived in company dormitories and were told to leave when their jobs were terminated. Some ended up on the streets as they had little saving and unemployment insurance didn’t provide them with enough to get pay for new housing.

Some temporary workers were told to clear of their dormitory on the day they were notified they were laid off. One construction workers told the Los Angeles Times he slept in a subway and camped out ay Denny’s and finally pitched a tent in a Tokyo park after he was suddenly laid off.

A January 2009 survey counted 124,800 nonregular workers who lost their jobs, with only 10 percent of them able to find new jobs. Homeless shelters filled up with young people. Some women that lost their jobs lost their homes and were forces to sleep in all-night restaurants and Internet cafes.

A tent village made up of so-called “employment refugees” was set up in park in central Tokyo. Many of those there were temporary workers who lost housing with their jobs. A 49-year-old man in the villager told Kyodo, “I felt relief staying here as I had no food and housing, but I’m at a loss now and don’t know what to do next.” In Osaka, a 49-year-old temporary worker starved to death. The man was found dead in his apartment about a month after he died by apartment manner trying to collect overdue rent.

Labor lawyer Kenji Utsunomiya told the Los Angeles Times, “Suddenly workers were caught with no savings, nothing their pockets, because companies treated them as mere objects they could get rid of at their whim. People believed the government would take care of them. Now they know that’s not true.”

People saved money by making their own bento lunches at home and staying at home more. Game consoles, cooking appliances, gardening kits, and substandard goods with minor damage and strange shapes sold well. The bars and clubs in Ginza reported sharp drops in the numbers of customers and had lay off workers. Some struggled to stay afloat.

Response to Economic Crisis in Japan in 2008

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Prime Minister Taro Aso
The Bank of Japan injected trillions of yen into the money market to prevent disruptions in interbank borrowing and to make money available for investment. At one point it injected ¥1 trillion a day for a string of more than 30 days to facilitate interbank borrowing. The Bank of Japan also offered ¥1 trillion in loans to banks to encourage them to lend money and increased its purchase of government bonds by nearly 30 percent to pump more money into the economy.

Unlike during the recession in 1990s, companies were quick to lay of workers, idle factories and cut inventories. That is why the growth figures dropped so dramatically in late 2008 and early 2009 but the recovered quickly.

Firms cut production at the fastest pace in 55 years. They laid off workers, scraped plans for new factories, froze large capital spending projects, closed down some existing plants, temporarily shut down others to avoid overproduction, withdrew from the sponsorships of sports, and canceled bonuses and compensation for executives and board members.

There were concerns about protectionism. Some Americans blamed Japanese car makers for the troubles of American car manufacturers. In a series of radio commercials one Ford dealer in Georgia called the Japanese “rice-ready, not ready” and said, “On them Japanese cars, even when they’re brand new, how come they don’t smell like a new car?”

The financial crisis provided an opportunity for Japanese banks and investment houses to snap up assets and stakes in major Wall Street firms at fire-sale prices and improve their positions and stature abroad. Nomura Securities became the world’s largest independent investment bank after it picked up key Lehman Brothers assets in Asia, the Middle East and Europe at fire sale prices after Lehman collapsed in autumn 2008.

In December 2009, the Bank of Japan said it was going to inject ¥10 trillion (about $115 billion) into the economy.

Stimulus Coupons and the Government Response to Economic Crisis in 2008

The Japanese government launched a $568 billion stimulus package that included public works projects, tax cuts and programs to address global warming and boost health and child care. Among the elements were subsidy of ¥250,000 for people who replaced gas-guzzling vehicles with fuel-efficient ones.

The package was projected to raise real growth by two percent and create between 400,000 and 500,000 jobs. The first wave of benefits included 1) ¥1 trillion in housing subsidies and other support for temporary workers who had been discharged from their accommodation and 2) ¥12 trillion in loans and grants to banks to encourage them to lend money and relieve the credit crunch.

Japan launched a total of three stimulus packages that totaled about 5 percent of GDP (about the same size as the U.S. stimulus package) that according to the World Bank was “well-calibrated.” The government provided aid through the state-backed Development Bank of Japan to troubled companies like Elpida Memory and Japan Airlines. The total budge reached a record $100 billion. Because there was not nearly enough tax revenue to cover this, more than a third of the costs was covered by government bonds.

More than ¥2 trillion was given out to citizens to stimulate spending among consumers. Each resident of Japan was given ¥12,000 in coupons, with an additional ¥8,000 given to those under 18 and over 65. There was some discussion of whether the relatively well-off should be excluded but in the end everyone was included.

When asked how they would spend the money 28 percent of those asked in one survey said they blow would blow it on a nice meal out; 22 percent said they would spend it on living expenses and 22 percent said they would spend it on travel.

There was a lot of resistance to the stimulus package because it was seen as a waste of money that worsened an already bad debt situation and put on a burden on young people coming of age in the future. There was a lot of resistance to the money given to citizens. Many saw it as an effort to win brownie points for the ruling party on the eve of an election

The stimulus packages seemed like overkill to many. Takayoshi Igarashi, a professor of politics at Hosei University told the Washington Post, “Our infrastructure is impeccable. More public works would be a surplus to real need. It would not stimulate anything but the construction industry.”

Recovery from Economic Crisis in Japan in 2008 in 2009

While Japan suffered in 2008 and 2009, posting negative growth of 5.4 percent for 2009, it was one of the first and fastest to recover, with positive growth figures at the end of 2009 and predicted growth of 1.7 percent for 2010.

According to the IMF credit for a quick recovery went to a “well-calibrated response” that included three stimulus packages that totaled 5 percent of GDP and the fact that Japanese businesses “did a pretty through cleaning of the house” that included cutting costs, trimming workforces and idling factories. In early April 2009, the Nikkei rose above 9,000. It rose that high earlier but was unable to syay that high due to uncertainty over the economy and dropped again. In mid June 2009, the Nikkei rose above 10,000 on the belief that crisis had bottomed out.

In the second quarter of 2009, the economy grew 3.7 percent, with a big boost coming from increased exports and some help coming from the government’s stimulus package. It was welcome news after the 11.7 percent contraction in the first quarter and it showed that the worst was over and Japan was on track for a healthy recovery.

GDP expanded by 4.8 percent in the third quarter, 2009. By this time Japanese companies were posting positive earnings and better than expected sales and profits and fund managers were buying Japanese stocks. The trade surplus had risen for the six months in a row with robust demand from China “driving Japan’s growth.” Forth quarter GDP was 4.6 percent in an annual base in the October-December 2009 quarter. The figure was seen as a sign that recession was ending and the recovery was for real. In fiscal 2009- 2010, Japan posted its first trade surplus (of ¥5.23 trillion) in two years.

Return of Deflation in 2009 and 2010

In mid November 2009, The government announced that economy was in deflation for the first time in three years. Prices at grocery stores dropped as they battled for customers. Department stores dropped their prices because they couldn’t get customers to buy anything otherwise. Property values of houses were falling. Perhaps most worrisome of all was the fact that wages were falling, a sign that a deflationary spiral---in which people are afraid to spend money because they worry they will earn less in the future, fueling more deflation---was setting in.

In late November 2009, the yen rose to its highest value against the dollar in 14 years when it hit ¥84.82 to the dollar with strong buying of the yen as a safe haven on the news of severe debt problems in Dubai. The last time the yen was that strong was in July 1995.

In 2010, Japan continues to be troubled by deflation, high public debts, weak domestic demand softening exports and a strong yen. Growth for the January-March 2010 quarter was 1.2 percent. Growth for the April-June 2010 quarter was only 0.1 percent due to cooling exports and flat domestic growth taking hold as stimulus measures introduced to perk up the economy were wearing off. The sluggish show was enough to drop Japan the world’s No.3 economy behind China and Japan’s GDP for the quarter was $129 trillion compared to $1.34 trillion for China.

In May 2010, share prices fell during the Greek economic crisis. The Bank of Japan injected ¥2 trillion to stabilize markets. In August 2010, the Nikkei sunk to a nine-month low and 10-year Japanese government bonds yields fell below one percent over concerns of a sluggish economy at home and abroad and worries about the impact of the strong yen.

More Stimulus Measures and Spending in 2010

In March 2010, in attempt to stimulate the economy, the Japanese government pushed a record 92.3 trillion yen ($1 trillion) budget through Parliament aimed at stimulating growth in the long-stagnant economy. The Japanese economy grew at a healthy clip of 1.2 percent in the first quarter of 2010 but some economists worried about runaway government spending. Japan at that time was already saddled with a public debt twice the size of its economy.

In late August 2010, Japan promised a host of measures in a bid to ignite its faltering economy and temper a punishingly strong yen. Kan proposed new stimulus steps, while the Bank of Japan, under pressure from the government, further eased its already easy monetary policy.

In September 2010 the government approved a $1.1 billion stimulus package that among other things continued the eco points system for buying energy-efficient appliances and provided funds of build overseas factories to ease the impact of the yen’s rise and provide subsidies for environmentally-friendly and energy-saving sectors, providing employment support for new college graduates and the jobless.

In September 2010 the government proposed a $6 billion stimulus package that focused on five areas: job creation, economic growth, social welfare, revitalizing regional economies and deregulation and including $1.3 billion for child care support and other social welfare programs and $350 million for job creation,.

Reasonable Growth and Positive Signs in 2010

The Japanese economy expanded by an annualized real 4.5 percent in the July-September 2010 period due mainly to the pump-priming measures, with consumer spending. Sales for things like energy-efficient refrigerators, air conditioners and flat-screen televisions rose with he introduction of an eco-point system but fell when the number of eco-points awarded was halved.

Though Japan’s economy contracted 1.3 percent in the fourth quarter, it expanded 3.9 percent over all in 2010 compared with a year earlier, signaling a recovery from a punishing recession in the wake of the global economic crisis. Growth in fiscal 2010-2011 (from April 2010 to April 2011) was 3.1 percent. Unemployment was around 5 percent.

Japan’s economy for 2010 was valued at $5.47 trillion. Exports were up 24 percent, the first rise in three years. Exports and factory output are helped by strong demand from China and other emerging economies in Asia. In November 2010, the Nikkei closed above 10,000 for the first time in five months, powered by strong performance of Japanese banks, slight weakening of the yen, and strong exports.

Strong Yen after the Lehman Brother Collapse

The yen continued to strengthen, falling below ¥85 to the dollar in August 2010 to ¥84.72, and reaching a 15-year low in September, falling below ¥83 to ¥82.87. The strong yen continued to be seen as primarily a negative thing and there were calls for the Bank of Japan and the government to do something to reverse the trend.

Conventional thinking had always been that the value of a currency rises when the a country’s economy is strong and declines when the economy is weak. So why has the yen appreciated when Japan’s economy has been far for robust. Osaka University professor Yoshiyasu Ono, an advisor to Prime Minister Naoto Kan, thinks this has occurred as result of improved productivity by Japanese economies.

Junuchi Maruyama wrote in the Yomiuri Shimbun , “When the nation’s exports slow due to a rise in the yen, firms try to improve productivity by cutting production costs and improving competitiveness in the global market. As a result exports do not decline significantly. Instead, imports fall as domestic companies cut jobs to streamline business...The drop in imports is due to a decline in domestic demand. When imports is due to a decline in domestic demand. When imports decline while exports do not, the nations current account surplus will grow, prompting further appreciation of the yen.”

“One believes a vicious cycle occurs, with the yen’s rise causing layoffs that prompt domestic demand to fall, bringing about a further appreciation of yen. Conversely, improving the job market and boosting domestic demand will efficiently break this cycle and stem the rise in the yen. The high value of the yen also has its roots in the economic probes in the United States and he. Major investors consider the yen to be a safer investment than the dollar or the euro.

“Even though Japan’s economy is no great shakes,” Maruyama wrote, investors “purchase the yen because they believe Japan’s currency does not violently fluctuate and its exchange risks are easy to manage compared with the those of the greenback and euro, whose value may suddenly plunge at any time.”

Response to the Appreciation of the Yen

In September 2010, the Japanese government and the Bank of Japan took decisive action to lower the value of the yen, helping Japanese exporters, by selling ¥2.13 trillion in yen and purchasing dollars. It was Japan and the world’s largest single day invention ever and the first time in 6½ that the Japanese government and BOJ had made such an intervention. The intervention seemed to work. Afterwards the value of the yean weakened to the ¥85 to ¥86 range. The Kan government and BOJ said it was prepared to take more action if necessary. Some U.S. lawmakers were critical the move, comparing it to China’s manipulation of the yuan.

Japan made the move unilaterally without support from the Western nations, which had little incentive to intervene on Japan’s behalf because they were having their own economic problems and trying to spur exports, which a lower-valued yen would hurt. Acting unilaterally is usually regarded as a no-no unless economic conditions are highly volatile. In the end the move seemed to have little impact. After the intervention the yen weakened to just above the ¥80 mark, not fare from the postwar low of ¥79.75 in April 1995. In October 2010, the dollar fell against the yen to a new 15½ year low of ¥81.08.

Defiying conventional wisdom exports were strong. In the first half of fiscal 2010 (April to September ) there was the strongest surge in exports in 20 years and Japan’s surplus soared. Gains that Japan has earned from interest earned on foreign currency bonds it bought during exchange intervention’sometimes referred to as “buried treasure”---amounted to between $10 billion and $20 billion in 2010. The government tapped into the fund to cover a shortfall in its budget.

Toyota, Honda and other Japanese companies responded by shifting their assumed exchange rate projection to ¥80 from ¥ 85 and ¥ 90 and tried to move as much production overseas as possible to cut costs. The IMF lowered its growth estimate of Japan from 1.8 percent to 1.5 percent.

The high yen encouraged Japanese manufacturers to move more operations overseas. Carmakers, steelmakers, electronics companies and precision tool makers moved more operation to China and other countries in Asia and bought more goods from producers that had their facilities outside Japan.. This helped the manufacturers survive but was bad news for Japanese workers and towns that depended on the industries being in Japan.

Value of Yen Rises After the Earthquake and Tsunami

When the Japanese economy was hit by the powerful earthquake and a nuclear power plant accident in Fukushima Prefecture in March 2011, the yen rose to a postwar record-high of 76.25 yen against the U.S. dollar. In May 2011 the value of the yen rose again to the ¥80 to the dollar, reaching ¥79.57 the rise was mainly due, analysts said, to concerns about the U.S. economy. It also dipped below the ¥80 mark in June.

Why was the yen bought up in a time of crisis like? You would think people would be more likely to buy other currencies. According to Kyodo News: “The yen was bought on the back of growing anxiety... Fears over the nuclear power plant accident led to a stock plunge in Japan, pulling down share prices overseas as well. Investors who try to avoid investing in risky assets such as stocks and currencies of emerging economies are fleeing their funds to the Japanese currency, which is considered safe. Speculators have capitalized on such moves, lifting the currency by nearly 5 yen against the dollar.” [Source: Kyodo News, March 17, 2011]

Why was the yen considered ''safe'' even after the earthquake and tsunami in 2011? According to Kyodo News: “The Japanese economy has been suffering from low growth and prolonged deflation since the collapse of the bubble economy in the early 1990s, prompting the Bank of Japan to introduce the monetary easing policy to keep interest rates lower than levels in other countries. Under such circumstances, while it is unlikely the economy will see robust growth, there is little risk of the economy collapsing or the yen falling sharply. In addition, Japan maintains a current account surplus with abundant external assets, making investors feel comfortable buying the yen whenever anxiety grows in the market.

Isn't it strange that the yen is being bought when the Japanese economy itself is a source of concern now? It appears to be a strange phenomenon, but the yen's ''myth of security'' remains persistent, leading yen buying to surpass selling pressure stemming from prospects of deterioration in the Japanese economy. The yen was also bought on speculation that Japanese companies would repatriate overseas assets and convert them into yen to cover disaster-related costs. [Ibid]

How did hedge funds and other speculative funds move? There is a view that they have launched yen buying by capitalizing on speculation that Japanese insurers are repatriating overseas assets to prepare for massive payments of insurance claims resulting from the quake. But insurers have denied that they have sold assets denominated in foreign currencies on a large scale to secure yen funds for insurance payments. [Ibid]

Is the strength of the yen likely to continue? There are many market participants who believe the yen will face buying pressure while the prospects of disaster reconstruction and nuclear power plant troubles remain unclear. But other participants point out that money will be invested in higher-yielding currencies as emerging nations continue to see high growth, reducing the yen's value. Some say overseas investors could start engaging in ''Japan selling'' and bring down the yen if the nuclear power-related troubles deepen further. [Ibid]

Foreign exchanges holding are a measure of economic links with other countries and a manifestation of imports and exports, investment and speculative “hot money” flowing into local markets.

As the cost of raw materials around the globe rose, so too did prices in Japan for things like bread and flour (three to eight percent), eggs (10 percent from the previous year), T-shirts and underwear (10 percent to 30 percent) and towels ( 30 to 50 percent in a eight month period). The price hikes reflected rising prices for raw materials such as wheat, corn and cotton.

Record High Value of Yen

In late August 2011, the dollar briefly hit a record low of 75.95 yen on the New York foreign exchange market, breaking the previous record 76.25 yen set on March 17th after the March 11th disaster in northeastern Japan. The gain occured after a vice finance minister expressed caution on monetary intervention. The dollar was later traded at mid-76 yen, still hovering around historic lows against the yen.

Japanese monetary authorities say the rapid rise of the yen will have negative impact on the economic recovery from the March disaster, further damaging Japan’s already-hurting exporters and possibly causing firms to transfer production outside Japan. The prime minister's office was conspicuously silent on the matter. Aides quoted the prime minister as saying he intends to "keep watching the situation" for the time being before deciding whether the government and the Bank of Japan should intervene in the markets again or launch further quantitative monetary easing.

Many officials close to Kan believe there is little Japan can do to rein in the yen, other than a market intervention and quantitative easing, because the yen's climb has been fueled by financial unrest in the United States and Europe, sources said. "The prime minister can't afford to worry about that" because he is tied up with his pending resignation, one aide said. "The fact that investors are gobbling up the yen despite the political situation here shows just what bad shape the economies of the United States and Europe are in." After the credit rating of long-term Japanese government bonds was downgraded in January, Kan caused an uproar when he admitted he was "out of touch with such things." [Source: Yomiuri Shimbun, August 21, 2011]

A few days later the dollar briefly rebounded to ¥77 on hints by government officials there might be some kind of intervention. Finance Minister Yoshihiko Noda said Japan will take decisive action against the yen’s sharp rise. The change in the yen’s value was not much as currency players reasoned that an intervention would not have much of an impact if it were taken.

On how all this relates to the dollar, William Pesek of Bloomberg wrote: “Investors display an obvious preference for yen over dollars. That the IOUs of a debt-ridden, aging, politically adrift nation smarting from a huge earthquake and nuclear crisis seem safer than U.S. Treasuries says it all.

High Value of Yen Hits Companies Hard

Yoichiro Kagawa and Etsuo Kono wrote in the Yomiuri Shimbun, “Companies struggling to recover from the impact of the Great East Japan Earthquake also have been rocked by the strengthening yen, which has risen to the 77 yen level against the U.S. dollar in Tokyo. Many exporters had predicted the exchange rate in fiscal 2011 would be between 80 yen and 83 yen per dollar, so the rise of the yen beyond this level has put them on the ropes.” [Source: Yoichiro Kagawa and Etsuo Kono, Yomiuri Shimbun, August 1 2011]

Additional negative factors such as electricity shortages and the continuing aftereffects of the disaster have prompted economists to voice fears that the nation's industries may be hollowing out. In its consolidated business results for the April-June quarter, released Friday, Mazda Motor Corp. announced an operating loss of 23 billion yen because of the disaster and the rise in the yen's value. In the same quarter last year, Mazda was 6.3 billion yen in the black. Kiyoshi Ozaki, executive vice president of Mazda, said, "We can't overcome the effects of the current rise in the yen's value through our own efforts."

Hitachi Ltd. also released its consolidated operating profits for the same quarter on Friday, which showed a decline of 15 billion yen. Nissan Motor Co.'s operating profits fell by 55 billion yen. In contrast, rivals in other countries, especially South Korea, are upbeat. In its consolidated business results from January to June this year, which were released Thursday, South Korea's Hyundai Motor Co. recorded higher sales and profits. The automaker increased sales partly because it took orders for products normally supplied by Japanese-affiliated makers.

Although the value of South Korean won has recently risen against the dollar, the South Korean currency has been more competitive than the yen. Mazda's Ozaki said, "South Korean and European manufacturers are making significant inroads in the U.S. market for compact cars. Their prices are more attractive [compared to Japanese cars due to the effects of the strong yen]."

However, Japanese companies are doing their best to cope with the strengthening yen. Toyota Motor Corp. has announced it plans to establish a base in the Tohoku region to build compact cars from development to production with the aim of overcoming cost-cutting competition with firms from emerging countries. Nissan was to spin off its plant in Kandamachi, Fukuoka Prefecture, on Monday. The plant will become a production base capable of competing with firms from emerging countries by increasing parts procurement from South Korea and China.

Toshiba Corp. is expanding overseas production of flat-screen TV sets and some other products that it will import into Japan, to circumvent the strengthening yen. Sony Corp. has raised its percentage of overseas production to about 70 percent, so the negative effects of the yen on its profits are virtually zero.

Takahide Kiuchi, chief economist of Nomura Securities Co.'s Financial & Economic Research Center, said, "There is a spreading view that the government will take no action to deal with the strengthening yen or help affected companies, so there is definitely a risk industries will hollow out."

High Value of Yen and Per Capita GDP and Mergers and Acquisitions

Hiroko Tabuchi wrote in the New York Times, “Despite the disruption caused by the devastating earthquake and tsunami in March, Japanese companies spent $26.6 billion on mergers and acquisitions overseas in the three months through June, the highest quarterly volume in almost three years, according to Dealogic. “When the yen is on an upward trend, it creates a favorable environment for M.&A.’s,” Kotaro Masuda of the Institute for International Trade and Investment told the New York Times, referring to mergers and acquisitions. “It also becomes possible for companies to buffer against currency risks by producing more overseas.” [Source: Hiroko Tabuchi, New York Times, August 18, 2011]

The Asahi Group has used the strong yen to expand overseas. In August 2011 the beer company said it was buying Independent Liquor of New Zealand for ¥97.6 billion, or $1.3 billion, as the Tokyo-based beverage maker looked to increase its sales overseas to make up for a shrinking market at home. Asahi, the maker of Japan’s top-selling beer, Super Dry, and soft drinks, said that it would buy all outstanding shares of Flavoured Beverages Group, the parent company of Independent Liquor, from the private equity firms Unitas and Pacific Equity Partners, adding the Woodstock Bourbon and Vodka Cruiser labels to its family of drinks.

Asahi’s purchase followed a bigger overseas acquisition by its rival Kirin, which said this month that it would buy a controlling stake in Schincariol, a Brazilian beverage maker, for $2.6 billion.

Japan's per-capita gross domestic product in 2010 stood at $42,983, advancing to 14th in the rank of developed economies from 16th the previous year, helped by the sharp rise of the yen against the U.S. dollar, the government said. The list of 34 OECD countries by per-capita GDP was topped by Luxembourg, which logged $105,313, while Norway ranked second with $84,473. The United States was eighth with $46,588. The per-capita GDP of China, not a member of the OECD, was $4,430. [Source: Kyodo, December 27 2011]

“Total nominal GDP stood at $5.50 trillion, taking up a global share of 8.7 percent and staying flat from 2009. China, at 9.4 percent, replaced Japan as the world's second-biggest economy after the United States, at 22.9 percent, the Japanese Cabinet Office said. Japan's per-capita GDP has grown only about 11 percent since 1994, when it ranked second in the list of the Organization for Economic Cooperation and Development, as the country's economy has been mired in chronic deflation. In 2010, though, the amount was the biggest ever for the country because it was stated in dollars. [Ibid]

Lower Credit Rating for Japan Because of Its High Debts

In January 2011, the New York Times reported, “Standard & Poors, the credit ratings agency, lowered its sovereign credit rating for Japan to AA- from AA. That was three levels below the highest possible rating, and S.& P.’s first downgrade of Japanese government debt since 2002. With the lower grade, the country's debt rating was on par with China’s, which in 2010 overtook Japan as the world’s second-largest economy, after the United States. Moody’s affirmed its Aa2 rank for Japan, the third-highest grade.”

“S.& P., in downgrading Japan, warned that the Japanese government had no “coherent strategy” to address its ballooning deficit, and that its already high debt burden was likely to continue to rise further than it had anticipated before the financial crisis. A rapidly aging population is adding to the country’s woes, raising the likelihood of increasing social security and pension obligations in the future. The news came just over two weeks after the credit ratings agency Standard & Poor’s downgraded Japan’s long-term sovereign debt, to AA- from AA, three levels below the highest possible rating. It was the first time S.& P. had downgraded Japanese government debt since 2002. A rival ratings agency, Moody’s, kept its Aa2 rating for Japan, its third-highest rating, though it later warned that the assessment might be downgraded if the nation failed to carry out fiscal reforms.” In February it changed its Aa2 rating from stable to negative.

Japan’s liabilities will hit 204 percent of its gross domestic product this year, outstripping the 137 percent for debt-ridden Greece, according to figures from the Organization for Economic Cooperation and Development. S.& P. said then that it expected Japan’s debt to continue rising until the middle of this decade, and “We do not forecast the government achieving a primary balance before 2020, unless a significant fiscal consolidation program is implemented beforehand.”

Image Sources: 1) Shugin House of Representatives site 2) Wikipedia 3) China Labor Watch 4) Kantei, Office of Prime Minister 5) Tokyo Stock Market 6) markun.cs.shinshu-u.ac.

Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

Last updated October 2012

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