Gst, last week I bought some puts on the yen. You might want to think about it too.
>March 17, 2001
Japan's government yesterday officially acknowledged what economists have long feared: The world's second-largest economy is being hit by the longest bout of price deflation since the Great Depression, erasing any hopes that it can rebound from its decade-long recession.
Japan's continuing economic woes have dire implications for California and the rest of the United States, which count on Japan as a key investor in stocks and factories as well as the world's biggest market for U.S. exports.
"Japan is not the big investor that it was a few years ago, but the U.S. still needs its investments to make up for the current account deficit," said Tomoko Iwakawa, foreign exchange adviser for Union Bank in Los Angeles.
Japanese investments finance most of the United States' huge current account deficits on trade, which hit a record $435.4 billion last year.
Equally important, concern about the fragility of the Japanese economy may be preventing Federal Reserve Chairman Alan Greenspan from making dramatic cuts to U.S. interest rates.
"Another round of serious interest rate cuts might break apart the Japanese banking system," said George Friedman, an international affairs specialist who heads Stratfor.com, an online report on global politics. "Greenspan sees that the Japanese economy is near its breaking point. He does not want it to crack and, if it does crack, Greenspan does not want the United States to be the catalyst."
Worries about the health of Japanese banks -- which number among the biggest in the world -- caused instability throughout the world's stock markets this week, due to fears that the banks will soon have to sell off their massive stock holdings to remain solvent.
The Japanese economy has been in dire straits since 1990, when a large bubble in its overinflated stock market and real estate sector suddenly burst.
Last summer, after the economy began to show signs of growth, the government optimistically declared the recession over and began raising interest rates, which had long hovered near zero.
Now, it seems apparent the government moved too soon.
The Nikkei stock average, which hit a 52-week high of 20,833.21 last April has since lost 41 percent of its value, closing yesterday at 12,232.98. The Nikkei is now at its lowest point in 16 years -- lower than it was at the beginning of the bubble that drove the index to nearly 39,000 points in late 1989.
In addition, the Japanese yen is suffering a sharp decline, losing 7 percent of its value since the beginning of the year. It is now at its lowest point against the dollar since mid-1999.
Decreasing machinery orders hint that corporate investment is slowing. Wholesale prices have dropped more than 9 percent -- good news for consumers, but bad for companies trying to keep their heads above water. And unemployment has risen to record highs of 5 percent -- low by U.S. standards, but more than twice as high as it was in the early 1990s.
The decline in the economy has led to chaos in Japanese politics. According to some opinion polls, Prime Minister Yoshiro Mori -- rumored to be planning to resign -- has an approval rating of between 5 percent and 9 percent. The ruling Liberal Democratic Party, or LDP, is likely to be voted out of power in the upper house of parliament in elections slated for May. However, the hodgepodge of opposition parties has not yet produced a leader capable of filling the vacuum.
"Most people believe the LDP will lose, but nobody's saying somebody else will win," said Takeo Hoshi, professor of Japanese economics at the University of California San Diego.
The economic problems in Japan are already having a rippling effect on the U.S. economy. Since the mid-1980s, for instance, Japan has been the largest source of foreign investment in California, with investments hitting a peak of $40 billion in 1996. Then those investments dropped by more than 10 percent by 1998 -- the latest period for which comprehensive figures are available.
Recent layoffs at U.S. factories owned by such firms as Toyota and Sony -- which axed 500 positions in Rancho Bernardo in January -- hint that more cutbacks are coming.
Japan remains a strong market for California exports, buying $17.3 billion worth of goods last year -- but that figure represents a rebound after three consecutive years of decline caused by the Asian economic crisis of 1997-8. Japan is still buying fewer goods than it did in 1997, however. In the interim, Mexico has replaced Japan as the state's top export market.
"We need a healthy Asia to buy U.S. exports," said Alan Gin, economist at the University of San Diego. "We were able to power through the Asian economic crisis because we had a strong economy. Now that we have a weak economy, we need strong export markets."
Yet Japan's appetite for foreign goods may dry up as the government tries to combat deflation.
One method of fighting deflation is to print more money, making the value of the yen go down even further against the dollar. That would keep Japanese consumers from buying so many exports from abroad. And it would make Japanese goods even cheaper for foreigners. The United States' burgeoning trade deficit could widen even further as U.S. customers clamor for the cheaper goods.
Yesterday, Japanese Finance Minister Kiichi Miyazawa said the government "wouldn't manipulate the foreign-exchange market" to combat deflation. Yet, with interest rates near zero, economists say there are few other choices. |
