ECONOMY AFTER THE MARCH 2011 TSUNAMI: RECOVERY AND SLOWDOWN IN 2012

ECONOMIC RECOVERY AFTER THE MARCH 2011 EARTHQUAKE AND TSUNAMI

By June, four months after the March earthquake and tsunami in 2011, supply chain disruptions had largely been fixed and key factories were up and running as reflected in Japan’s first trade surplus since the disaster. By September the recovery was more or less complete and the summertime energy restrictions were over and car manufacturers and electrical machinery makers were revving up production and showing signs of optimism despite the strong yen and debt problems in Europe. In the summer of 2011, consumer sales soared in the disaster-hit Tohoku region as people began buying replacement goods for things they lost in a big way.

In July 2011, U.S. industrial output recorded its best gain in seven months in part because the auto sector was coming back and boosting production as supply disruptions linked to the March 2011 earthquake and tsunami eased. In August exports rose for the first time in six months---albeit at a modest 2.8 percent---and this was also seen as a sign that progress was being made in the recovery from the disaster.

The Economist reported: “Lots of things could go wrong with the economy and public finances. The clean-up bill has raised new fears about the government’s ability to pay for it and bring Japan’s big public debt under control at the same time.”

Among the businesses that did well in the wake of the disasters were: 1) car companies that sold cheap mini-cars and used car dealers that sold vehicles to people who lost their cars in the tsunami; 3) bottled water companies; 4) enterprises that make and sell radiation detection devices; 5) producers of LEDs and software that measures electricity usage; 6) construction companies involved in reconstruction; and 7) companies that provided trucks and heavy machinery used to clean up debris.

Tourists and Foreigners after the Fukushima Crisis

A total of 531,000 non-Japanese left Japan is the four weeks after the March 11 earthquake and tsunami, including 244,000 who left in the first week. To describe the exodus the term “fly-jin” and “bye-jin” “an adaption of gaijin, the Japanese term for foreigner. Thirty-two embassies in Tokyo closed or shifted their operations to western Japan. But during the same four-week period, 302,000 foreigners arrived in Japan.

The number of foreign tourists visiting Japan fell by 73 percent in March 2011 from a year earlier. As of mid April, 560,000 people canceled hotel reservations nationwide in the wake of the quake. At least 80,000 foreigners canceled plans to visit Japan. Some foreign airlines cancelled flights. Normally busy shopping and tourist area were empty.

The earthquake and tsunami in 2011 had a devastating effect on tourism both in Japan and abroad in places that usually welcomed lots of Japanese tourists. Foreign tourist were reluctant to visit Japan because of worries about radiation and Japanese tourists cancelled their trips overseas mainly due, it seemed, to worries connected with the disaster. Business to and from Japan also fell off and several airlines cut back the number of flights to Japan.

The disaster was particularly a blow for Japan because it has commonly been thought of as a safe tourist destination. Chinese tour agencies suffered mass cancellations after Beijing sent buses to evacuate thousands of Chinese nationals from quake-stricken northeast areas. And issued a travel advisory. Japanese officials were frustrated that countries like the United States and South Korea issued travel advisories for all of Japan not just northeast Honshu where the earthquake and tsunami struck.

At one stage more than 50 nations urged their citizens to leave Japan or refrain from coming. By mid April countries such as Russia, France and the United States had lifted or eased their travel warnings. Still it took some time to recover. The number of foreign tourists in April and May were down 62.5 percent and 50.4 percent respectively from the previous year.

As part of the effort to lure visitors before the summer travel season ends, the Japan National Tourism Organization recently posted online the radiation levels for downtown Tokyo, which the tourism group says are lower than in tourist destinations such as New York, Singapore and Hong Kong. Among the group's efforts are online videos of race car drivers, ice skaters and other celebrities, including Lady Gaga, urging travelers to visit the country. [Source: Hugo Martín, Los Angeles Times, July 26, 2011]

In an efforts to attract foreign tourists back to Japan after visitor numbers plunged in the wake of the March 11 Great East Japan Earthquake, 41 international celebrities and cultural figures who love Japan have pooled their efforts to create an English-language guidebook called Travel Guide to Aid Japan . Among those that contributed were American fashion designer Tommy Hilfiger, French singer-actress Jane Birkin, American musician Jake Shimabukuro, Dutch author Karel von Wolferen, Indian conductor Zubin Mehta and Spanish chef Ferran Adria. They recommended places foreign tourists should visit.

But Japan's tourism industry faces several hurdles, including lingering fear among foreign travelers about potential radiation hazards and increasing fuel prices that keep airfares to Japan high.

Longer Term Economic Impact of the Earthquake and Tsunami

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cleaning up and rebuilding
The economic toll---including the damage to exports and international trade---of the earthquake and tsunami in 2011 defies a full reckoning. The twin natural disasters could cost Japan in excess of $300 billion, including $60 billion in insurance pay outs, with the government picking up much of the tab. The World Ban estimated it would take Japan five years to rebuild and recover from the disaster. Signs of economic loss could also be found in many corners of the globe, raising questions about the effect on the still-weak economic recovery in the United States, Europe and Japan.

Steve Lohr wrote in the New York Times: “As bad as the toll might eventually be in lives and property from Japan’s earthquake and tsunami, the fact that the disaster hit far from Japan’s industrial heartland will at least soften the economic blow, both at home and abroad. The epicenter was in and around the coastal city of Sendai, nearly 200 miles northeast of Tokyo, the nation’s population center, and well north of Japan’s primary manufacturing region running from Nagoya to Osaka and farther south and west.” “If this had been a couple hundred miles to the south, the economic and human toll would have been almost incomprehensible,” said Marcus Noland, a senior fellow at the Peterson Institute for International Economics. “In that respect, Japan dodged an enormous bullet here.”[Source: Steve Lohr, New York Times, March 11, 2011]

“The disaster could prompt the Japanese government to pump more money into the economy, analysts say, and is very likely to result in increased public spending on buildings and roads,” Lohr wrote. “And it could propel Japan’s already strong currency, the yen, even higher against the dollar and other global currencies, as Japanese money invested abroad returns to help in the rebuilding. In global currency trading on Friday, after the earthquake, the yen did edge higher.” [Ibid]

“Because Japan occupies an unstable slice of the earth’s crust and tremors are a routine part of life, Japan’s government, scientists and industry are almost continually engaged in moderating the impact of earthquakes through innovative building designs, strict construction codes and advance planning...And over the past two decades, the Japanese automakers have shifted a large portion of production of cars sold for the United States to American plants, while Japanese parts suppliers have set up shop in North America as well. “Given their contingency plans for earthquakes, and all the production done abroad these days, I’d be amazed if this had a real impact on Toyota or other leading Japanese car companies,” said Clyde V. Prestowitz Jr., a Japan expert and the president of the Economic Strategy Institute, a nonpartisan policy research group in Washington.

In 1995, after the devastating earthquake centered in Kobe, a port and industrial city, which killed more than 6,000 people and caused more than $100 billion in damage, the yen rose in value against the dollar 20 percent in the following two months. Some analysts predict that the yen will strengthen in the wake of this earthquake, too. Why would a disaster cause a nation’s currency to gain in value? In Japan’s case, the answer lies partly in the country’s high savings rate and sizable investments abroad.” “As households see their physical assets destroyed, need funds for reconstruction and become more risk averse,” Michael Hart, an analyst for Roubini Global Economics, wrote on Friday, “they are likely to repatriate their savings.” In doing so, they would convert their foreign holdings back into yen, increasing the demand for the Japanese currency, thus driving up its value. Still, a strong yen could pose problems for Japanese exporters, by making their products relatively more expensive on the global market.

For Japanese consumers, spending to increase household inventories of food and other daily necessities will probably increase, but outlays for luxury goods and services, notably tourism, will fall sharply, Masaaki Kanno, a Tokyo-based economist for JPMorgan Securities, predicted in a note to clients...The disaster, economists say, may well prod Japanese policy makers to increase government spending to stimulate the economy, despite adding to the nation’s sizable debt burden in the near term. And private investment on construction should increase as well. “There should be some positive impact because of the rush to rebuild,” said Edward J. Lincoln, a Japan expert at New York University’s Stern School of Business. “Perversely, you may have an economic benefit from this over the next year or two.”

Foreign Investors Attracted to Japan After the Disaster

An industry ministry white paper issued in July 2011, according to Kyodo, said that securing free trade agreements with other countries was important for Japan to recover from the aftermath of the March 11 disasters as well as to attract more foreign businesses. "If various costs are reduced by free trade agreements...it would give a boost to (companies') production activities that have started to recover," the white paper said. It "might be desirable" that Japan join a regional free trade accord currently being negotiated among the United States and some other Asia-Pacific countries, the paper added. [Source: Kyodo, July 9, 2011]

Japan’s stock market fell by a fifth immediately after the disaster. In the months that followed it would have have plummeted further were it not for foreign investors who pumped $60 billion into the marktes as opposed too domestic institional investors who pulled $25 billion out. The Economist reported: “The investment flow has been more steady than large. It has been targeted at certain sectors like machine tools, construction equipment and electronic parts, rather than across the board. And the money is said to be from large institutions which are cautious getting in and patient before getting out. Japan has also benefited from money that has been pulled out of the Middle East and North Africa this year. Traders say that investors from China and other Asian countries may be buying through intermediaries.” [Source: The Economist, June 2, 2011]

The attraction for foreign buyers is that Japanese shares are cheap relative to other markets. “Investors are buying value, not momentum,” says one fund executive. Mark Mobius, an emerging-markets investor at Franklin Templeton, says that now is one of the best times to buy Japanese equities in many years because their price/earnings ratios are comparatively low.

Foreign investors... are pinning their hopes on a bounceback to growth in the second half of this year thanks to reconstruction spending. Many are expecting a boom in corporate profits on the back of buoyant exports...Soon after the earthquake, tsunami and nuclear crisis, many foreigners (called gaijin in Japanese) fled the country. Insulted Japanese nicknamed them flyjin. Even the head of the Tokyo Stock Exchange, Atsushi Saito, heaped scorn on them. But maybe they now deserve some credit for greasing the wheels for the market recovery. Time to change their name again, to buyjin.”

Rebuilding the Economy in Disaster-Struck Tohoku

Takashi Shiraishi, president of both the National Graduate Institute for Policy Studies and the Institute of Developing Economies, Japan External Trade Organization, wrote in the Yomiuri Shimbun, “To ensure the recovery of the Tohoku region, the government should establish a special economic zone encompassing Fukushima, Miyagi and Iwate prefectures, together with efforts to strengthen the area's links with manufacturing networks in other Asia countries.

Shrasihi proposes designating the three Tohoku prefectures as a special economic zone where corporation tax should be lowered to internationally competitive levels and regional and global economic partnerships encouraged by having Japan join the TPP (trade agreement) framework. We already have a good example in Okinawa Prefecture. Naha Airport now serves as an international hub for cargo being transferred overnight to and from Narita, Haneda, Kansai, Seoul, Shanghai, Taipei, Hong Kong and Bangkok. Cargo reloaded at Naha at night is carried to any of the eight airports the following morning. I recommend that this cargo flight network include Sendai Airport to help enhance the Tohoku region's links with the rest of Asia. Another idea is to beef up a trunk seaborne cargo route from the Tohoku region to Hong Kong, Ho Chi Minh City and Singapore via Osaka and Fukuoka. Nontariff barriers also should be reduced. If the government adopts a set of measures pertaining to those air and sea networks, economic benefits will be a substantial plus not only for the three Tohoku prefectures but all of Japan.

In October 2011, the Japanese government said will launch a project to make the Tohoku region a hub for recovering rare metals from small electric appliances, including cell phones collected from across the country, to support the reconstruction of areas hit by earthquake and tsunami. Tohoku once prospered as a mining region, and there are a number of business enterprises that have the technology to recover rare metals.

In May 2012 Jiji Press reported: “Japan Finance Corp. said 79 percent of its 1,164 small and midsize client companies that were directly affected by the March 2011 earthquake and tsunami have seen sales recover to more than 80 percent of predisaster levels. Sales remained at 50 percent or under for 7 percent of all businesses surveyed. Many operate in Pacific coastal areas in the Tohoku region that were devastated by the tsunami. [Source: Jiji Press, May 2, 2012]

Japanese Economy in Late 2011 and 2012

“The economy shrank 0.7 percent in the October -December 2011 quarter. According to The Economist: “Radiation fears hurt exports. A strong yen walloped profits. Floods in Thailand interrupted the distribution of electronics and car parts. Corporate-governance scandals cast a black cloud over blue suits nationwide. [Source: The Economist, December 17, 2011]

In December 2011, Kyodo reported, Nikkei index lost about 17 percent during 2011 to mark the lowest year-end close since 1982, affected by the yen's rise to a postwar high, the March earthquake-tsunami disaster and Thai floods. The 225-issue Nikkei Stock Average ended up at 8,455.35, the lowest year-end closing level since the index finished in 1982 at 8,016.67. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished at 728.61, falling around 19 percent on the year. [Source: Kyodo, December 31, 2011]

In 2012 things weren’t much better. The 225-issue Nikkei Stock Average plunged from above 10,000 yen at the end of March 2012to the 8,900 yen level in May due to the political turmoil in Greece. Bloomberg reported: The yen’s post-2008 surge has been accelerating in tandem with Europe’s meltdown. Japan’s export industry, the lifeblood of the economy, is reeling. Profits are down and so is market share amid competition from South Korea (KOSPI) and China. Disruptions after a giant earthquake in March 2011 further dented Japan’s standing as a manufacturing center and as a reliable link in the global supply chain. Calls for radical action on the yen are getting louder by the day. [Source: William Pesek, Bloomberg, July 30, 2012]

But still unemployment wasn’t bad, especially compared the 8 percent rate in the U.S. And the 20 percent rate in Spain. Unemployment fell rate was 4.3 percent in June 2012. Unemployment fell to 4.4 percent in May 2012 from 4.6 percent in April and was 4.5 percent in February and 4.6 percent in January 2012. Unemployment fell to 4.1 percent in September 2011 from 4.3 percent in August, according to figures from the Internal Affairs ministry showed. [Ibid]

Government Intervenes on Yen in October 2011

In late October 2011, the Japanese government and the Bank of Japan intervened in the currency market, selling the yen and buying the U.S. dollar as the yen hit another record high. "I've repeatedly said we would take decisive steps against speculative moves, but [speculators'] one-sided actions, which do not reflect Japan's real economic state, have continued," Finance Minister Jun Azumi said. "I therefore ordered the market intervention at 10:25 a.m." The intervention was the first since the government and the central bank staged a unilateral intervention in August. The intervention also was unilateral, Azumi said, adding the government informed U.S. and European authorities of Japan's position and national interests. [Source: Yomiuri Shimbun, November 1, 2011]

“The Yomiuri Shimbun reportedly: Monetary authorities apparently concluded that if the yen remained in the historically high 75 yen-range against the dollar, the country's exports would stagnate and corporate performance would suffer. That would cause the domestic economy, which has been gradually recovering since the Great East Japan Earthquake, to lose its momentum and slip back into recession. [Ibid]

“The intervention came as the yen soared to 75.32 yen against the dollar in Oceanian trading, exceeding the previous postwar high of 75.67 yen marked on the London exchange market. "[It was a level] that could not be overlooked. The decision was made this morning," Azumi said. The week before the yen reached new postwar highs in the New York and London markets for three consecutive days. There also was increased yen-buying, dollar-selling pressure in the market due to speculation the U.S. Federal Reserve Board will further ease its monetary policy at its Federal Open Market Committee (FOMC). [Ibid]

“The intervention marked the third since the March 11 disaster. Azumi declined to comment on the exact size of the latest intervention, but market observers believe Japanese authorities injected at least the same amount as they did on August 4, 2011, about 4.5 trillion yen. The August 4 intervention was a record high in terms of single-day volume. [Ibid]

“Afterwards the value of yen lowered some. Fo much of the remainder of 2011 and in 2012 it was between 75 and 80 yen to the dollar. Tomoko Echizenya wrote in the Yomiuri Shimbun it remained uncertain whether Japan's unilateral intervention would be sufficient to reverse global dollar-selling pressure as the current exchange rate mainly reflects developments in the U.S. and European economies. [Ibid]

“The 75 yen-range against the dollar poses a serious threat to the Japanese economy. The Bank of Japan's quarterly tankan survey in September showed that large manufacturers in the country projected a yen-dollar exchange rate of 81.15 yen for fiscal 2011, substantially weaker than the actual figures. If export-oriented companies accelerate moves to relocate their plants overseas it could hurt the employment situation in Japan. [Ibid]

Japanese Economy Begins to Pick Up with Six Percent Growth in the Third Quarter of 2011

Hiroko Tabuchi wrote in the New York Times: “Japan’s economy grew at a 6 percent annualized rate in the third quarter, signaling a strong recovery after the devastating tsunami in March. Still, a slowing global economy and a stubbornly strong yen cloud the outlook for Japan, the world’s third-largest economy. Helped by a rebound in exports and consumption, the gross domestic product expanded 1.5 percent in the three months through September, compared with the previous quarter, numbers released by the Cabinet Office showed. The widely expected uptick, equivalent to an annualized rate of 6 percent, was the first expansion in the Japanese economy in four quarters. [Source: Hiroko Tabuchi, New York Times, November 13, 2011]

“The rebound underscores the speed at which Japanese industry has been able to get back on its feet after the March 11 earthquake and tsunami, rebuilding factories and re-establishing supply chains severed by the destruction. Exports jumped 6.2 percent as manufacturers got production back on track. Private consumption, which accounts for almost two-thirds of Japan’s economy, grew 1 percent, helped by a rebound in consumer sentiment and replacement demand in the tsunami zone. [Ibid]

“Still, policy makers and economists also worry that the punishingly strong yen of recent months as well as weak growth in major trading partners, like the United States and China, will take a toll on Japanese exports. The crisis at the Fukushima Daiichi nuclear plant, meanwhile, has thrown the country’s energy policy into disarray and cast a pall over Japan’s recovery. [Ibid]

“Because global investors see the yen as a safe haven in times of global economic turmoil, its value has climbed to historic highs in recent weeks amid fears over Europe’s debt crisis. A strong yen hurts the competitiveness of Japanese exports and erodes the value of exporters’ repatriated earnings. [Ibid]

“The government is also spending heavily to support post-tsunami reconstruction. In November 2011 the lower house of parliament approved a 12 trillion yen ($155 billion) spending package aimed at kick-starting recovery on the ravaged northeast coast of the country, bringing total spending pledged so far to 18 trillion yen ($233 billion). But Japan is already saddled with public debt more than twice the size of its $5 trillion economy. Unlike with Italy or Greece, however, investor confidence in Japan’s government bonds remains high, allowing the country to continue borrowing at low rates for the time being. [Ibid]

Japan’s Economy Grows 4.1 Percent in First Quarter of 2012

Japan’s economy grew an at annual rate of 4.1 percent in the first quarter amid a gradual recovery from last year’s catastrophic earthquake and tsunami, AP reported. The Cabinet Office said that the preliminary growth figures showed that a rebound in consumer spending was lifting the world’s third-biggest economy. After the March 11 disaster last year, many Japanese were in mourning and stayed away from stores, theaters and pubs. That compounded the damage from disruptions to manufacturing in northeastern Japan, where many auto and electronics plants ground to a halt, and other parts of the country. [Source: Yuri Kageyama, AP, May 17, 2012]

“The latest data showed that private consumption grew at an annual rate of 4.4 percent. Consumer spending makes up more than half of Japan’s economy. “The numbers show a solid Japanese economic recovery,” said Satoshi Osanai, economist at Daiwa Institute of Research in Tokyo. Consumer spending got a significant lift from government subsidies for green vehicles that sent buyers to dealerships for hybrids and other fuel-efficient models. Also robust was public investment at 23.6 percent, reflecting reconstruction spending on housing and other building work in the devastated northeastern region. [Ibid]

“Japan’s economy grew 1.0 percent in the quarter ended March from the October-December 2011 quarter. That was better than the 0.7 percent projected by analysts in Japan, and translates to a 4.1 percent expansion in annualized terms. The latest growth marks a third straight quarter of growth, although still at fragile rates. The economy was virtually flat October-December but did not shrink. [Ibid]

Japan’s Debt Reaches $12 Trillion in 2011, More Than 2.3 Times Its GDP

According to the International Monetary Fund, Japan's debt-to-GDP ratio was about 230 percent in 2011, the worst among developed countries and much greater that the 161 percent chalked up by Greece. In addition, Japan's social security burden is increasing annually as the population grays.

Japan's debt burden is about $12 trillion, more than twice the size of its $5 trillion economy. This is by far the worst among industrialised countries. It has been built up as the government tried to stimulate the economy during two decades of sluggish growth and deflation. [Source: Reuters, May 22, 2012]

“Japan's national debt hit 960 trillion yen ($12 trillion), a record, at the end of fiscal 2011 (April 2011 to March 2012), the Finance Ministry said. The ministry forecasts that Japan's outstanding debts will top 1 quadrillion yen at the end of fiscal 2012. It said the government's total outstanding debt reached 959.95 trillion yen, up 35.59 trillion yen from a year earlier. [Source: Asahi Shimbun, May 11, 2012]

“Bonds made up the largest portion of debt at 789.34 trillion yen, a year-on-year increase of 30.77 trillion yen. Finance bills to provide cash for foreign exchange interventions came to 116.87 trillion yen, up by 6.08 trillion yen. Borrowing came to 53.74 trillion yen, down by 1.26 trillion yen. [Ibid]

“In May 2012, Fitch said Japan's gross general government debt is projected to rise to 239 percent of GDP by the end of 2012. Based on that projection, the ratio would have risen 61 percentage points since the global financial crisis, compared with a median of 39 percentage points for countries in the Organisation for Economic Co-operation. The government's own plan to reduce its debt burden doesn't foresee the debt/GDP ratio coming down until 2020/21. "Fitch regards this as a slow pace of consolidation given the scale of Japan's debt," it said. Ratings agencies have repeatedly warned Japan that its pace of fiscal consolidation is too slow to lower its debt burden and budget deficit. [Source: Reuters, May 22, 2012]

Japan Logs First Trade Deficit in 31 Years in 2011

Japan logged its first annual trade deficit in 2011 for over 30 years, Reuters reported, as the aftermath of the March earthquake raised fuel import costs even as slowing global growth and the yen's strength hit exports, threatening to erode the country's ability to fund its huge public debt with domestic savings. Few market players expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge past investments abroad, as a steady inflow of profits and capital gains from overseas outweigh the trade deficit. [Source: Reuters, January 26, 2012]

But the trade data underscores a broader trend in which Japan's competitive edge in the global market is eroding and it is increasingly reliant on fuel imports due to the loss of nuclear power, with reactors staying closed after routine checks due to public safety fears following the March disaster. "What it means is that the time when Japan runs out of savings -- 'Sayonara net creditor country'---that point is coming closer," said Jesper Koll, head of equities research at JPMorgan in Japan. "It means Japan becomes dependent on global savings to fund its deficit and either the currency weakens or interest rates rise.” [Ibid]

“Japan logged a trade deficit of 2.49 trillion yen ($32 billion) for 2011, Ministry of Finance data showed, the first annual deficit since 1980. Total exports shrank 2.7 percent last year while imports surged 12.0 percent, reflecting reduced earnings from goods and services and higher spending on crude and fuel oil. [Ibid]

“Bank of Japan Governor Masaaki Shirakawa said he did not expect Japan to continue logging a trade deficit as a trend and did not foresee the country's current account balance tipping into the red in the near future. But Japan's days of logging huge trade surpluses may be over as it relies more on fuel imports, which may weaken the yen in the longer term. Running a current account deficit would spell trouble for Japan as it means it cannot pay the cost of financing its huge public debt without overseas funds, although few analysts expect this to happen in the foreseeable future. ($1 = 77.7100 Japanese yen)

In April 2012, the Japan Times reported: Japan logged a record ¥4.41 trillion trade ($54.2 billion) deficit in fiscal 2011 (April 2011 to March 2012) as the March 11 disasters, the strong yen, reliance on foreign energy and Europe's debt crisis all rattled the economy throughout the year, the Finance Ministry said. The quadruple threat forced exports down 3.7 percent from the previous year to ¥65.28 trillion. Imports grew 11.6 percent to ¥69.69 trillion. [Source: Jun Hongo, Japan Times, April 20, 2012]

Energy Costs Push Trade Deficit in First Half of 2012 to a Record High

Japan's trade deficit in the January-June period of 2012 hit its highest level since 1979 at 2.92 trillion yen ($37.3 billion), the Finance Ministry announced. The trade deficit rose from 963.2 billion yen in the corresponding period last year and has already surpassed 2011's annual figure of 2.56 trillion yen. On a first-half basis, this year's figure is larger than the record of 2.62 trillion yen seen in 1980, when the nation was impacted by the second oil crisis and imports skyrocketed. [Source: Yomiuri Shimbun, July 26, 2012]

“The Yomiuri Shimbun reported: “Due to the suspension of most nuclear power reactors, imports of liquefied natural gas and crude oil to fuel thermal power plants surged, pushing up the trade deficit. Sluggish exports were also behind the deficit, particularly to Europe, which is struggling with financial crises, and China, which is experiencing an economic slowdown. The ministry's foreign trade statistics calculate the values of imports and exports based on the price of goods that pass through customs, and show the overall trade balance of the nation. [Ibid]

“The total export value in the first half increased for the first time in three half-year periods, rising 1.5 percent from a year ago to 32.6 trillion yen. By category of goods, exports of automobiles rose 38 percent and those of auto parts rose 16.3 percent from the first half of 2011. Most of these exports went to the United States. The total import value increased 7.4 percent to 35.51 trillion yen, surpassing that of exports. By category, imports of LNG rose 49.2 percent and those of crude oil rose 15.7 percent. [Ibid]

Fitch Cuts Japan's Credit Rating in May 2012

In May 2012, Reuters reported, Fitch cut Japan's sovereign credit status to the lowest level among global ratings agencies as a political stalemate dims the chance that the country can curb its snowballing debt. Fitch Ratings cut Japan's long-term foreign currency rating by two levels from AA to A plus, the fifth highest investment grade. It cut the more important local currency rating by one notch from AA minus to A plus. Both were given a negative outlook. Fitch warned further downgrades were possible unless the government takes new fiscal policy measures to stabilise public finances and its ratio of debt to gross domestic product. [Source: Reuters, May 22, 2012]

“The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch said in a statement. "The country's fiscal consolidation plan looks leisurely, relative even to other fiscally challenged high-income countries, and implementation is subject to political risk.” [Ibid]

“After Japan's ratings cut, the dollar rose against the yen to a session high of 79.85 yen. But analysts said the downgrade is unlikely to have a lasting impact on markets because Japanese government bonds are mostly held by domestic investors. Fitch's A plus local currency rating for Japan is the one most closely followed by investors because the government's debt is largely funded by domestic investors, who are backed by about $15 trillion in household savings. Bank of Japan data shows that domestic investors held 93 percent of government debt as of December. [Ibid]

“Concerns among ratings agencies over Japan's debt and the inability of successive governments to come up with a credible plan to deal with it are not new. Moody's downgraded Japan by one notch in August 2011, blaming a revolving door political leadership, a reference to Japan's six prime ministers in five years. S&P cut Japan's ratings in January 2011, saying Japan lacked a convincing plan to deal with its debt and also citing political risks. [Ibid]

Foreign Ownership of Japanese Debt Climbs While Bonds Cover Almost Half the Japanese Budget

In March 2012, Kosaku Harioka wrote in the Wall Street Journal, “Foreign ownership of Japanese government debt rose to 8.5 percent at the end of December, from 6.5 percent a year earlier, putting it just under the record-high level of September 2008, as overseas investors sought the perceived safety of Japanese bonds amid the European sovereign-debt crisis. The total of Japanese government debt, including short-term treasury bills, held by investors from outside Japan reached a record ¥78 trillion ($947 billion) at the end of last year, out of a total of ¥920 trillion, according to Bank of Japan data. [Source: Kosaku Harioka, Wall Street Journal, March 25, 2012]

“Late last year, amid growing risk over various sovereigns overseas, the relative stability of Japanese government bonds was valued," a Bank of Japan official said at a briefing. "The ownership ratio by overseas investors rose as a result." Of the ¥78 trillion of Japanese government debt held by non-Japan residents, roughly 65 percent was in longer-term bonds and the rest was in shorter-term bills. In the quarter ended September 2008, just as the Lehman crisis was starting to hit the global financial system, the ownership ratio by non-Japan residents, including foreign governments and institutional investors, rose to 8.6 percent. That is the highest on record since comparable data became available in December 1997. [Ibid]

“Although the share of JGBs held by foreign accounts remains below 10 percent, overseas investors "are raising their positions as important investors," the central-bank official said. Japan's overwhelmingly domestic ownership of its debt has been seen as a strength for the Japanese-government-bond market, helping Japan to avoid a Greece-style crisis even though its gross debt ratio, at 200 percent of gross domestic product, far exceeds Greece and all other industrialized nations. Foreign holders are seen as more likely to sell if Japan's economic outlook deteriorates or its fiscal picture worsens. At the same time, analysts say that a moderate rise in foreign ownership is a positive for the market because it helps to diversify from the historical dependence on domestic banks and insurers, which together account for 65 percent of all JGB holdings. [Ibid]

“In December 2011, Kyodo reported: “Japan's reliance on debt in the initial budget for fiscal 2012 is set to hit a new high of around 49 percent---the worst level ever, officials said. The reliance on debt highlights the difficulties facing Prime Minister Yoshihiko Noda, who has said Japan remains committed to restoring its fiscal health, which is the worst among the major developed countries. [Source: Kyodo, December 25, 2011]

The Cabinet will approve the draft general-account budget for fiscal 2012---a ¥90.33 trillion ($1.16 trillion) package “the officials said. The size of the budget is smaller than the ¥92.4 trillion for fiscal 2011, which was the biggest ever for an initial budget. Of the total, around 49 percent, or ¥44.24 trillion, will be raised through new government bond issuance, breaking the previous record of 48.0 percent set by the initial fiscal 2011 budget. [Ibid]

“Tax revenues for fiscal 2012 are projected at ¥42.34 trillion, but the government is also counting on nontax revenues, including surplus funds transferred from other budget accounts. That amount, however, excludes the more than ¥3 trillion allocated under a different account earmarked for reconstruction work following the March 11 earthquake and tsunami. This means the government will have to keep struggling to balance the need for crucial spending with its resolve to restore its fiscal health. The government will also spend about ¥22 trillion just to service existing debt

Euro Falls Below 94.50 Yen; Lowest Level in 12 Years

“In July 2012, Jiji Press, reported: “The euro sank below 94.50 yen, its lowest level in nearly 12 years in Tokyo, dragged down by renewed concerns about Spain's fiscal conditions. As market players sought relative safety in the yen, the dollar also saw selling against the yen, temporarily slipping below 78 yen for the first time in seven weeks. [Source: Jiji Press, July 24, 2012]

“The euro's slide followed news that Spain's debt-ridden Valencia region will seek financial help from the central government, traders said. The negative news more than offset eurozone countries' official agreement to provide up to 100 billion euros in financial support to troubled Spanish banks, they said. Citing the news, an official of a bank-affiliated think tank said, "The Spanish central government's fund-raising program could be affected due to the need to help local governments.” [Ibid]

“Against the U.S. currency, the euro fell below 1.21 dollars for the first time since June 2010. "The eurozone is saddled with the debt problem while speculation of additional monetary easing is increasing in the United States," Kengo Suzuki of Mizuho Securities Co. said. "The yen tends to attract purchases as players are left with few other options." As the euro continues falling versus the yen, the dollar also remains vulnerable to sales for yen, a Japanese bank official said. [Ibid]

Nikkei's 23 Percent Gain in 2012 Is Best since 2005

Brad Frischkorn wrote in the Wall Street Journal: “Japan's stocks closed out 2012 with the seventh gain in nine sessions, and the Nikkei Stock Average logged a 23 percent climb for the year, its biggest percentage rise since 2005. With a 10 percent surge since the start of the month, the benchmark index ended the year at 10395.18, its highest closing level since March 10, 2011, the day before a powerful earthquake and tsunami struck the northeast region of the country. It also is the first full-year rise in three years. [Source: Brad Frischkorn, Wall Street Journal, December 28, 2012]

A steadily weakening yen and persistent interest from foreign investors have been key to the gains, as players hold out hope that the new Liberal Democratic Party of Japan leadership will be able to engineer an end to deflation and put the nation on a path to economic recovery. Political rhetoric and fervent hopes have seen the yen fall from its perch over the last six weeks, losing more than 8 percent against the dollar and more than 12 percent against the euro. "Overseas investors continue to key on the falling yen," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "Not many expected the market to rise this far this fast toward year-end, forcing a lot of short-covering as well.” [Ibid]

A weak yen is key for Japan's important export industry to survive. With global central banks embarking on robust monetary easing policies over the last few years to avert a global financial industry collapse, the Japanese currency has surged against the dollar and the euro in recent years. That encouraged many investors to trim their holdings of Japanese stocks, and the Nikkei lost 3 percent in 2010 and 17 percent in 2011. It remains down 40 percent from end-2006. [Ibid]

The Bank of Japan embarked on more easing steps in the first quarter, pushing the yen down and the Nikkei through 10000. But subsequent worries about Europe's financial health, as well as robust loosening from the U.S. Federal Reserve, sent the dollar plunging anew and the yen rising. The currency began a noticeable reversal in mid-November, when snap elections were called for the lower house of parliament. The unpopular Democratic Party of Japan was swept from power a month later, putting the LDP back at the controls with an overwhelming mandate for change. [Ibid]

LDP leader and now Prime Minister Shinzo Abe has been pushing for more aggressive central-bank policy, including a 2 percent inflation target; the country continues to fight deflation, and the central bank has a 1 percent inflation goal. Armed with the ability to nominate a new Bank of Japan governor in 2013, investors see this goal as having a fighting chance to actually succeed. "Hopes for looser central bank policy and a weaker yen remain firm," said Hiroichi Nishi, general manager of equities at SMBC Nikko Securities. "The stalled U.S. budget talks remain a focus of attention, but players are not willing to let a good Japan trade opportunity go to waste.” [Ibid]

Image Sources:

Text Sources: New York Times, Yomiuri Shimbun, Daily Yomiuri, Washington Post, Los Angeles Times, Kyodo News, National Geographic, The Guardian. Times of London, The New Yorker, Time, Newsweek, Reuters, AP, AFP, and various books and other publications.

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© 2008 Jeffrey Hays

Last updated January 2013

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