Japanese held hostage by U.S. buyers
yomiuri.co.jp
[Mish comment - What a fantastic article - read the whole thing]
Favorite snips - Lots of them:
The facts speak for themselves: in 2003, Japan spent about 180 billion dollars to protect companies against a rising yen. For this year, Prime Minister Junichiro Koizumi's national budget raises potential intervention firepower by 61 trillion yen or about 580 billion dollars. Put another way--after spending 15 billion dollars on average every month in 2003, Japan now has the budget to spend 48 billion dollars per month to protect its corporations from a falling dollar--48 billion dollars is more than three times Japan's monthly current account surplus. As if to leave no doubt about the global political economic realities, 48 billion dollars also amounts to just about the monthly U.S. budget deficit funding requirement.
Is this money well spent? The answer, of course, lies not so much in cold-blooded economic analysis, but in the hard-nosed realpolitik instincts of Koizumi. First, there is a short-term concern over the July upper house election. Second, there is a medium-term strategy to build a competitive advantage for Japan in Asia. And third, there is a longer-term goal of building a greater codependency between Japan, the United States and China.
The medium-term strategy goal of increasing Japan's competitive advantage in Asia is much more subtle, but, in my view, much more significant. In the real world, however, the effectiveness of Japan's strategic defense against the dollar's decline must not be underestimated. The big losers will be European companies, German ones in particular, because Japan's determination stands in sharp contrast to Europe's' policy disarray, political infighting and central bank inaction. The result--yen depreciation against the euro--will haunt German and European capital and consumer goods makers for years to come. It goes far beyond the short-term windfall profits for Japanese exports to Europe and operations there. It allows Japanese companies to gain market share and build deeper relationships and brand loyalty where it really counts--Asia in general, China in particular; and when it counts--it is now or never that China's demand pull is accelerating, now or never that China's emerging middle class is carving out its brand and product preference. Here Japan's aggressive foreign exchange policy stance helps out much more than commonly appreciated, particularly by European politicians focused on domestic infighting rather than global strategic policy planning.
[Mish note: this is exactly why Japan bitched when Europe threatened its own currency intervention!]
Increased codependence is evident from the macroeconomic fact that Japan and the United States are currently engaged in the biggest vendor-finance relationship ever seen. Japan alone funds about 40 percent to 50 percent of the U.S. current account deficit by buying U.S. debt. Put another way, Japan and China cannot stop buying U.S. debt, because doing so would cause a U.S. recession that in turn would quickly force a sharp rise in Chinese and Japanese unemployment.
The power of the two largest creditor nations--Japan and China--acting together, perhaps beginning to renegotiate the terms of the dollar-based global financial system, would pose a real challenge to G-7 financial leadership. This, however, is unlikely as long as the U.S. consumer is the buyer of first and last resort for the excess capacity of Japan and China. Unless there is another buyer, the vendor remains hostage to its buyer.
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Great article.
Thanks to Chispas who first posted the link!
Mish |
