Strong yen feeds a 'clash of generations'
Comment of the Day

August 01 2012

Commentary by David Fuller

Strong yen feeds a 'clash of generations'

This is an interesting and informative article on a subject often discussed by Fullermoney over the last few years. Here is the introduction:
SHIZUOKA, Japan - As Japan has ceded dominance in industry after industry that once lifted this nation to economic greatness, there has been plenty of blame to go around. A nuclear disaster that raised energy costs. A lack of entrepreneurship. China's relatively cheap work force.

Increasingly, however, business leaders point to a punishing threat that is at least partly within the government's power to control: a high yen that has made Japanese exports, from televisions to memory chips, prohibitively expensive abroad. In an echo of a debate that raged in the United States in the 1980s, the government faces growing criticism for doing almost nothing to rein in the yen, despite alarm that the record-high currency is dealing crippling blows to the country's once all-important export machine.

One big reason, analysts and some politicians say, is simple, if generally left unsaid: A high yen benefits Japan's rapidly expanding population of elderly residents, even if it hurts other parts of the country.

By speeding the flood of cheaper imported products into Japan, the strong yen is contributing to a broader drop in the prices of goods and services, known as deflation, that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the postwar baby boom who make up nearly a third of the population and tend to vote in high numbers.


The Finance Ministry, meanwhile, has taken some steps to drive down the yen against the dollar, moving four times in the last two years to buy a total of $200 billion worth of the American currency. But officials said those amounts were never intended to do more than blunt surges driven by speculators.

A more effective step, economists said, would be for the central bank, the Bank of Japan, to essentially turn on the printing presses and create enough new yen to cause prices to rise rather than fall, encouraging the currency's value to drop. The Federal Reserve has done just that in response to the financial crisis and the economic weakness in the United States, since 2007 tripling the amount of bonds it holds, weakening the value of the United States' dollar and helping to foster a strong rise in American exports.

Critics say the Bank of Japan's entrenched bureaucrats have resisted doing something similar since 2007 out of an outdated fear of rekindling the rampant inflation in the value of real estate and other assets of the 1980s bubble economy. But the bank argues that it makes little sense to intervene without longer-range economic fixes, like deregulating protected domestic industries to spur competition.

As such debates rage on, the supercharged yen bolsters the ability of Japanese to buy foreign goods and to travel abroad, but continues to eat away at the foundations of the economy, hurting companies from mighty Toyota to small ones like Kyouwa, a manufacturer of factory automation equipment in rural Seki, an hour west of the rust-belt city of Shizuoka.

Kyouwa's second-generation owner, Ryuji Usuda, said he has been watching the rising yen with growing alarm and finally decided, after he lost an important Japanese customer last year to a Korean rival, that he had no choice but to move his production line to a new factory in Vietnam. He says the plant will allow him to make machines for 30 to 4o percent less than in Japan.

"Pretty soon, nothing will be made in Japan anymore," said Mr. Usuda, 40, who noted that many of the Japanese factories he supplied were also moving to Southeast Asia.

David Fuller's view Extrapolate this trend and Mr Usuda will be proved correct in his forecast immediately above. Industrial robots have slowed but cannot prevent a further hollowing out of Japan's industrial base. The country will remain a genteel retirement home while more capable and ambitious younger people take their companies offshore.

There is a solution to this 'clash of generations' in Japan.

Fullermoney has long maintained that Japan's stock market will struggle to make a significant recovery while the yen remains the world's strongest currency. The trick is to convince Japan's savers that a persistent government / BoJ effort to make the yen more competitive for the country's industrialists, would also make the stock market a better investment than JGBs.

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