By Tom Harris 16 Sep 2010 [0 Comments | 839 views]
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The yen is too high. Japanese exporters can’t compete. The economy of the rising sun has suffered a lost decade for nigh on twenty years now. The downturn could yet last for at least another decade. And then Japanese policy makers came up with a cunning plan. The US is seeing red.
But the solution is not down to Japan at all, it lies elsewhere. It lies with the end of the euro.
The yen hit a 15-year high against the dollar recently. Since the euro is cheap relative to the dollar, with 1.3 dollars to the euro last night compared to 1.5 last December, this means of course that Japanese exporters have lost even more competitiveness against European exporters. No wonder the authorities in Japan are so vexed.
And so, this week, the Japanese government has grabbed itself a fist full of yen, and then added several million more fistfuls, and flooded the market in a desperate attempt to drag the value of the currency down.
The policy worked, but only up to a point; the yen fell slightly, but reversed only a tiny fraction of the rises seen over the last year or so.
Japan’s Prime Minister Naoto Kan said: “We will absolutely not permit precipitous moves in the yen.”
A part of the problem is the difference between interest rates in Japan and in the US. Or to put it more accurately, there is no difference. But a few years ago, Japanese rates were much lower than in the US. As a result, some savvy investors borrowed money from Japan, and re-lent into the US at higher interest rates. At the same time, Japan’s answer to Auntie Joan – you know, that great aunt who has got lots of money stashed away in a savings account – found she could get a much better return for her money by lending it abroad. So money flowed out of Japan, pushing the yen down, and money flooded into the US and Europe, which in turn helped create credit. It was called the carry trade.
The carry trade is dead, or if it does exist it’s the other way round.
In fact, to make matters worse, in some ways interest rates are actually higher in Japan than in the US and Europe. In Japan, inflation is negative. So, even if official interest rates are zero, that’s still positive in real terms. In the US, UK and Europe, real interest rates are negative.
Japan has of course got a more fundamental problem, too, namely the ageing of its population. But that is a story for another day.
But the move by the Japanese government to try and get the yen down has aroused the wrath of politicians in the US.
Sander Levin, Chairman of the US House of Representatives said: “This is a deeply disturbing development, and we will follow it closely.”
The snag is, and it’s one we have gone on and on about in the past, is that the world’s largest economies all want to grow via exporting more, relative to imports. And that just ain’t possible. If someone is exporting more, someone else must be importing more.
The FT quoted Tim Murphy, a Republican US congressman who said: “If this is a situation where every country is looking out for itself, that is a problem.” In fact, Mr Murphy is the very same Republican who has introduced legislation designed to penalise China for manipulating its currency.
Of course, this problem is hugely complex. One can slate China for manipulating its currency, but never forget, on a per capita basis, China is a poor country, and as far as she is concerned it is hypocrisy on the grandest scale when a super-rich nation such as the US is sitting on a legacy created in the 18th century when a system of tariffs protected US infant industries up until that point they had grown strong enough to stand on their own feet.
Anyway, returning to Japan, one can have sympathy with the country. Japan just doesn’t seem able to win. She wilts under two decades of anaemic growth; sees fiscal debt rise to levels that make Greek debt as a percentage of GDP seem quite modest; and now to cap it all has to do battle with a yen which is way too expensive.
Of course, China and Japan can respond to US charges by saying the US too is manipulating its currency via quantitative easing.
But it’s in the eurozone where the real cheek emerges. This is what Jean-Claude Juncker, who is the chair of the group made up of the eurozone finance ministers said: “Unilateral actions are not an appropriate way to deal with global imbalances.”
The reality is that the eurozone is a big part of Japan’s problems. The creation of the single market was a form of currency manipulation on a gigantic scale. The problems in Spain, Greece, Portugal, Ireland and Italy have dragged the euro down, affording Germany a massive advantage with its terms of trade outside of the eurozone. Alas, most of Germany’s eurozone partners are more reliant on exporting within the eurozone itself, and the cheaper euro is not helping them in this respect, not by one jot.
So what will happen next?
Japan has another option. She can hit the economic nuclear button, and print loads of money – in short, engage in massive quantitative easing. This will push the yen down, and since this is precisely the policy the US has adopted, Uncle Sam cannot complain.
However, until Germany does the same – tricky since she shares a central bank with other countries – the ultimate solution will remain elusive.
