The U.S. dollar rallied against Japanese Yen in an eight-month high on Wednesday, Dec 12, under speculation that the Bank of Japan will engage in aggressive monetary easing after Sunday’s general elections in Japan.
Japan’s resurgent far-right Liberal Democratic Party (LDP) leader Shinzo Abe, who is expected to be the next prime minister, has promised enough monetary stimulus to raise annual inflation to 2%.
Irrational fears of deflation have plagued Japanese political consciousness since the equity market implosion of 1990s, resulting in aggressive but fruitless spending measures to counter severe corporate debt induced economic contractions.
A weakening Yen will do very little to expand the fortunes of Japanese government or economy, but severely hemorrhage the purchasing power of Japanese citizens, especially the middle class, the poor and the retirees, many of whom rely on fixed incomes.
This is especially poignant, because the demographic structure of overpopulated Japan is thankfully experiencing graceful aging and population reduction. More than 23% of Japanese citizens are 65 years or older, and this percentage is all set to rise in coming decades.
There are three core arguments in support of expanding the existing stock of money.
First, the Japanese government may be able to finance itself by selling bonds directly to Bank of Japan, instead of issuing domestic and international bonds.
This strategy might turn out to be extremely counter productive, since it will endanger the long term credibility of Japan to manage its ballooning public debt, not withstanding the deep reserves of Japanese savers.
Second, Japan wants to keep the unemployment rate below 5%, and prevent the calamitous social depravity that is plaguing an aging, shrinking, dying Europe. The new stock of money will primarily pour into public infrastructure renewal, including roads, bridges, ports, bullet trains, nuclear power plants, schools, hospitals and parks, while creating tens of thousands of new jobs.
This argument has some merit, since any American or European who has visited Japan, instantly feels the shocking contrast between a decaying West and a state of the art Japan.
Nevertheless, Japan’s construction binge has its own tales of bridge to nowhere. For instance, the ultra-expensive and unnecessary Akashi bridge connecting Honshu to Shikoku, is considered the most prominent white elephant of Japanese construction industry.
Third, it is assumed without careful analysis, that a weaker Yen would act as a welcome shot of heroin in the arms of Japan’s manufacturing exporters, boosting operating incomes and market-shares abroad.
The downside of this approach is that two can play this game. A weaker Yen can provoke aggressive monetary easing from other central banks, in a race to the bottom, further eroding the consumer confidence, as vital imports such as fossil fuels and minerals become ever more prohibitively expensive.
There are also suspicions as to how far a weaker Yen will allow Japan to make gains in the international markets, since much of what it exports is extremely know-how intensive, with few peer competitors. Examples include advanced materials such as semiconductor grade silicon crystal, aircraft components made from carbon fiber, manufacturing robots for vehicle and communications equipment assembly.
Japan sits at the apex of capital goods “food chain”, alongside US and Germany. The other large economies such as China, India and Brazil depend upon these capital goods suppliers to keep their downstream sectors humming.
A wiser approach for Japan would be to celebrate a much stronger Yen, perhaps permitting it to rise as high as Y50 to every US dollar.
A stronger Yen will lower import prices, augment the purchasing power of Japanese consumers, offer renewed confidence to savers, and encourage manufacturing exporters to innovate and improve their productivity.
This will also mitigate the deleterious effects of recent consumption tax hikes on the purchasing habits of Japanese consumer.
What then of the Japanese government’s ability to finance itself?
The solution to that may be found in greater efficiency, cutting wasteful expenditures to reduce debt load, and accelerating the consolidation of local and prefecture level governments from the current ~1700 cities, towns and villages, to less than a thousand.
For instance, the fragmented administrative structure of the island of Shikoku (four provinces), with a population of less than 4 million does not make fiscal sense, when the northern island of Hokkaido, with 5.5 million people is one single prefecture. Shikoku can be similarly consolidated and branded into a single province, Ichikoku (one province).
A continually strengthening Yen in keeping with modern Japanese currency history, will also motivate Ben Bernanke, Chairman of the Federal Reserve, to stop waging Jihad on the US dollar, and allow it to appreciate in value.
It will be a win-win approach for Japan and America, shoring the fortunes of entire world economy.