Gareth Morgan, director of Gareth Morgan Investments
This year’s chronic appreciation of the Yen begins the final chapter of what’s been a long history of international trading “success”. That the rise in the Yen that has already occurred over the last 10 years – about 180% against the US dollar in nominal terms, or 78% after adjustment for inflation difference – hasn’t demolished the Japanese current account surplus, is testimony to that economy’s ability to raise productivity faster than elsewhere. Or is it?
It’s unlikely that the Yen appreciation is simply a story of superior productivity, otherwise the Japanese economy wouldn’t have been trapped for four years in a coffin of economic stagnation. Super productive, competitive economies don’t give off the stench of stagnation like Japan has been. Despite a profusion of emergency surgeries – I can’t remember how many fiscal CPR’s they’ve tried – the economy just won’t get up and interest rate cuts do not encourage Japanese borrowers to get out and borrow to fund growth.
Right through this period of stagnation Japanese banks have struggled to avoid collapse as their long equity positions in non-performing companies have undermined the viability of bank balance sheets. So it’s easy to get the impression that two bits of sellotape and one of string are all that’s between the Japanese financial sector and meltdown. At the core of the Japanese question then is what is it that’s keeping the current account so strong.
One blow to Japan’s adjustment was the return of the LDP to power. This brought an end to the economic liberalisation process begun by the Hozokawa government. As a result the signs of greater import penetration that were starting to appear have faded. But more chronic has been the escalating reluctance of the Japanese private sector to invest abroad – meaning that the Japanese export sector’s demand for yen as they repatriate earnings, have a greatly reduced ‘natural’ offset in the form of Japanese entrepreneur’s willingness to buy up the world. The entrepreneurs too busy shoring up their shrinking balance sheets at home, and in some high profile cases, funding the legal cost of avoiding jail.
For some time Japanese firms have pursued a natural adjustment to the rising value of the yen – siting production facilities abroad and even exporting product home! But it’s clear that this type of adjustment simply hasn’t been occurring on a sufficient scale to provide a natural offset to the trade surplus. So we’re left with the question of how are the Japanese managing to maintain a trade surplus despite what looks to be a annihilation of exporters’ price competitiveness. We know a rising exchange rate enhances exporter performance rather than stuffs it – New Zealand can give testimony to that – but too much of a good thing always spoils and the yen’s rise is excessive.
Unfortunately the nub of the Japanese issue is that their exporters are still doing it – not because they’re profitable, that’s long gone – but because the losses they incur are shielded by peculiarly Japanese accounting standards and regulated shareholder support. No reason really to change the view I expressed some years ago – their financial sector is reminiscent of one bloody big Equiticorp. Until we see some heavy corporate failure there, Japan’s adjustment still lies ahead of them.