While
All Eyes Are on Europe, Japan Circles a Black Hole
While
all eyes are on the absurdist tragicomedy playing out in Europe,
Japan is quietly circling a financial black hole as its export
economy is destroyed by its strong currency and the global recession
Charles
Hugh Smith
7
August, 2012
There
is a terrible irony in export-dependent nations being viewed as "safe
havens." Their safe haven status pushes their
currencies higher, which then crushes their export sector, which then
weakens their entire economy and stability, undermining the very
factors that created their safe haven status.
As
long as Germany stays within the Eurozone, Japan is the primary
example of this dynamic. Should Germany leave the euro and return to
its own currency, it too will begin orbiting the financial black hole
of declining exports driven by a strengthening currency in a global
recession.
Economies
that are less reliant on exports are much less exposed to the
consequences of a strengthening currency.
We
can lay out the dynamic of Japan's currency and export-dependent
economy thusly:
1.
Export-dependent economies such as Japan, China and Germany rely on
strong exports to sustain their employment and growth.
2.
This means they must maintain positive current accounts (trade
surpluses).
3.
As their currencies strengthen, their exports become less competitive
globally.
4.
Export-dependent economies must pursue strategies to keep their
currencies aligned with their buyers, the importing nations.
5.
Germany has done so via the eurozone, which aligned its largest
import market, Europe, with its own currency.
6.
China has done so by pegging the renminbi (yuan) to the U.S. dollar
and restricting foreign exchange (i.e. not allowing a free-floating
renminbi).
7.
Japan has neither of these advantages, and must intervene in the FX
markets by buying and selling yen and dollars.
8.
Despite its well-known debt problems (see chart below), Japan retains
a massive and diverse industrial base, a current-account surplus (or
modest deficit with its nuclear power plants largely offline) and
large overseas assets.
9.
These assets, plus its homogeneous culture, makes Japan an island of
stability in an increasingly unstable global economy.
10.
For these reasons, the yen is considered a "safe haven"
currency and yen-denominated bonds as "safe haven" liquid
investments.
11.
As demand for yen rises, the currency strengthens, weakening the
competitiveness of Japanese exports.
12.
The "safe haven" status of the yen ends up hurting the
Japanese economy's primary engine, exports.
13.
The stronger yen ends up weakening the very attributes that make the
yen and Japanese bonds "safe havens."
14.
As the global economy slides into recession, exports decline sharply
under the double-whammy of falling demand and a rising currency.
15.
Ironic, to say the least.
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