It has been close to impossible to write about financial stuff over the last ~six months. This is mostly due to me not really understanding what on earth is going on.
As far as i can tell the underlying issues, predominately in the states, but also in the uk and europe, remain unresolved – there is too much debt, and in turn that debt is too highly leveraged. Accounting rules have been tweaked to allow the stock markets to play a game of ‘out of sight is out of mind’, and central banks (esp. the fed) are providing pots of money to the banks, essentially for free, that they can either use to buy bonds, returning 3 – 4%, or use to gamble in derivatives.
The real economy is still bumping along the bottom. It will continue to do so until either house prices rise / stabilise, private debt is paid off, and incomes start to rise again. However, given that almost all productive capacity has been shipped out of the western world to asia, it may never happen.
Maybe it’s no surprise that things haven’t become critical again, that we haven’t had some spectacular crash – when japan went through this experience it managed to deploy enough fake money and policy distractions that people were willing to believe that they’d paid to smooth out the curve. Of course the curve has continued on it’s sustained downward trend for twenty years. It’s hard to say that it would have been better to have it all happen in a weekend.
One of the biggest mysteries (too me at least) is how japan ends up with a relentlessly strong yen. Yes, the states is massively debasing the dollar, but how do you make the case that the yen, with massive debts hanging over it is a safer bet? There are all sorts of theories about the chinese moving out of dollar, buying yen, pushing up the yen, and forcing the japanese to sell yen and buy dollars. This give the chinese a mechanism to get out of dollars without crushing it, and destroying the value of their remain holdings. Very nasty if it’s true; clever nonetheless!
Given everything that was written about the yen crossing 115, 105, 90, you’d think japanese companies would be reeling at this point. However, it looks like things are ticking along. There has apparently been some fall in the export growth (ft.com):
On Monday the head of the national Iron and Steel Federation complained the yen’s rise above Y90 to the dollar was undermining manufacturers’ ability to compete against Asian rivals – a message given extra weight by the release of data showing slow export growth.
but it’s hard to get panicky about a decline in export growth, not quite the same as exports actually declining.
It may well be that japanese companies have already adjusted to the continual decline of the yen, and are using hedging strategies to protect themselves from large changes. The comment from the Iron and Steel Federation is amusing given that, as far as i know, resource poor japan doesn’t produce any iron ore, or mine any coal. If the yen is strong this presumably that raw materials (priced in dollars) are declining. It may well be that the spread between when the contracts were signed and the end product was sold is eating into profit margins, but i don’t see why it stop japan from competing by lowering its prices to reflect the lower materials costs.
The conclusion of the above article in the FT maybe reaches a similar conclusion:
In the end, Japan may simply have to learn to live with a stronger yen. This should not be as difficult as it sounds. The focus on the looming postwar record is misleading, given that the real value of the yen has been boosted in recent years by chronic deflation, while that of the dollar has been reduced by inflation.
On an inflation-adjusted, trade-weighted basis, the yen does not look particularly strong. And Japanese companies may yet prove able to adjust to its rise.
On Monday Toshiba, the technology group, announced that earlier planning for a possible rate of Y70 to the dollar had inspired it to change production and procurement policies. As a result, the company had actually been profiting from the yen’s recent rise.
Where Toshiba leads, the rest of Japan Inc may have to follow.
Change is never easy in japan, and i suspect there will be a period of quite severe pain for those who aren’t nimble enough to adapt in the short-term, but it does look like it can done.
There is another issue related to japanese companies repatriating profits earned in dollars, which end up being worth less by the time they arrive back home in yen. There are all sort of issues that would appear to be very hard to get to grips with – does it help or hinder someone like nissan to have factories in america, paying american workers in dollars, or having holding companies for american operations listed on the us stock markets, etc? All too much for me to think about. Perhaps the answer to that is to simply move away from relying on america as an export market – they have less and less money to spend as it is…