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Japan on the Rebound?

The current issue of Fortune magazine (July 22, 2013) features a 21 page advertising insert entitled Japan: Back on Track. The subtitle states that “Bold government policies are reinvigorating the economy, driving down the yen, boosting the stock market, and lifting GDP growth.”

All of this sounds great. Everyone should welcome vigorous growth of the Japanese economy as a way of giving a boost to the world economy. With Europe facing the strong possibility of another recession, and the Chinese economy slowing as well, one can only hope that Japan can get its own system on track. So what is actually stated in this piece?


The administration of Abe Shinzö is lauded for pursuing a policy of monetary expansion, government funding of public works programs and structural reforms. As evidence, the following graph is presented:


However, there is a muddle-headed aspect to these claims. The promotional piece states that, “the yen is up from its 2012 peak…” Anyone with the slightest understanding of economics knows that when the value of a currency drops in relation to a foreign currency, that is a downward movement. If the yen was up from its 2012 peak of around 79 to the dollar, it would be trading at 78 or 77. That would mean that it would only take 78 or 77 yen to buy one dollar. The yen has weakened to the 100 to the dollar (yesterday it was trading at ~99 to the dollar) level, meaning that it now takes more yen to buy a dollar. So the yen is now down from its peak, not up.

And that is a mixed blessing. If the Bank of Japan (BOJ) were consistent in its activity, as Chairman of the Federal Reserve Board Ben Bernanke has been in the U.S., and worked vigorously in concert with other pillars of the Japanese economy such as the Finance Ministry, the expansion of the money supply could work effectively to counteract the deflationary forces that have been plaguing the country for the past few years. Unfortunately, bureaucratic conflicts and a general timidity in regards to proposing policy have worked to counteract these actions. As shown in the graph above, although the monetary easing by the BOJ initially was effective in weakening it to ~103 yen to the dollar on May 22 of this year, it has strengthened ever since then. The reason is because BOJ bond purchases have not been coordinated with other economic actions, so corporate interests have just taken advantage of this to enhance their own balance sheets. That is exactly what has happened in the U.S., but we have a more open market system here. Japan’s mercantilist system requires a different approach. The Finance Ministry could issue directives to rectify that, but that requires the kind of bold thinking that Japanese bureaucrats shirk from.

The same criticism applies to Japanese government funding of public works programs. This has been tried innumerable times in the past and it has never worked. That is because the public works that were funded were little but “make work” projects with little real value. Much of the work this time will focus on rebuilding the northeast of Japan that was devastated by the 2011 earthquake and tsunami, so it will be of lasting value. However, even the first funds that were released have already been diverted to unrelated purposes due to political finagling.

And then, in regards to structural reforms, they have been necessary for many years now. Other administrations have tried to accomplish that aim, but have always been stymied by special interests. That is exactly what is recurring now. The Abe administration is taking part in Trans Pacific Partnership (TPP) negotiations at the moment, but has already requested that exceptions to the opening of Japanese markets be made in regards to rice and other products. Those products have been protected from market reform measures for more than fifty years. Now farmers are seeking to continue to maintain the status quo. If this kind of structural reform cannot be accomplished in the context of important negotiations such as with the TPP, how else will progress be made?

So what is the goal behind such a lavish spread as the one published in Fortune? Simple. It is for home consumption, nothing more. Japanese government and industry must show the folks back home that they are taking action to turn things around. Since Japan’s lifeblood is exporting, what better way to promote that than by a lavish advertising spread in a prestigious American magazine?

It brings to mind the words from George Bernard Shaw’s Caesar and Cleopatra: …wherefore it commonly happens that in great emergencies ye do nothing though each telleth his fellow that something must be done.

Abe and the BOJ took bold actions in the initial monetary easing vis-à-vis the yen. But it will take imagination to make it really work. It can only be hoped that the Japanese can follow through in the way that they should to really turn the economy around.

Those who wish to comment on the opinions expressed here may send their thoughts to info@GoWizardry.com. The most interesting responses will be addressed in future postings.

Robert J. Terry

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