While the situation is extremely tense in Japan at the moment with all eyes set on the Fukushima Daiichi Nuclear Plant, the Japanese markets are open and the obvious, not ethic at all but expected nonetheless, has happened. The Nikkei plummeted more than 11% in the earthquake's aftermath just to regain more than 5% today. Japan is now officially the playground for avid speculators and this can do no good to the forthcoming Japan recovery.
It is quite difficult to ask for stability in the markets when the country itself is still (literally) shaking, but investors and speculators should leave Japan some room to breath, for the greater good. Japan is still one of the biggest economies worldwide; playing against it just to make some easy money now is quite a stupid, short-sighted and naive thing to do and could have heavy consequences in the future. But we know human stupidity is second only to human greed, and that you cannot expect nothing good from the same people that invented subprime-mortgage-backed securities and thus brought the world economy to its knees... So let us analyze what Japan can do from here on.
Japan's instruments for recovery
Japan's economy is one of a kind, after booming heavily during the eighties, it entered a phase the Japanese call "The lost decade", stagflation after their asset bubble burst has plagued the economy since then. The global crisis we have been suffering since 2008 has not helped Japan totally get out of their slump at all, even though before said crisis Japan showed promising signs of recovery with GDP growths better than Europe or the US. Still, Japan is the world's third biggest economy after USA and China so it will not be bare-handed through its long, hard, recovery.
Starting this short analysis of Japan's instruments for recovery we have the Yen, a respected and solid currency that can give the Japanese government some room to maneuver. With the Yen we may be in front of Japan's main weapon for recovery, as it offers margin for depreciation if needed. Depreciation could help boost exports if needed (more about that later) and it is the first option that comes to mind for a country in search of growth so you can count on that. On top of that, Japan must not fear immediate inflation, after having had deflation as a travel partner for many years...
The first reaction after the quake has been the opposite though, the Yen has gone up slightly against its most significant pairs, the USD and the euro, maybe in preparation of what is to come.
What about lowering interest rates as an instrument to ease credit and boost growth? Well, there is not much to talk about here, as the Bank of Japan fixed a 0.0% interest rate long time ago, they have their hands tied in this aspect. The recovery will not come from easier credit, that is simply not possible. What Japan must be worried about right now is keeping the credit flow going after the disaster, and to ensure that the Bank of Japan has been injecting liquidity in the markets without hesitation since the earthquake.
Debt issuing. The go-to solution for careless European governments will not be the first option here neither, as Japan's debt to GDP ratio is already 200%. Issuing more debt would only aggravate the country's already existing problems. On top of this, rating agencies are expected to lower Japan's rate due to the catastrophe, which would make issuing debt more expensive than it is now. In fact the Bank of Japan has already announced they will be intensifying bond-purchases to control their public and corporate bond yield's not going up indiscriminately.
Economy growth. Japan has one of the strongest industrial networks in the first world, with companies such as Toyota, Panasonic, Sharp, Mitsubishi, NTT Docomo... that should make recovery a little bit easier, but their companies are already among the most optimized. They are frequently used as an example of good management and production methodology so there is not a lot of room for fast improvement there. To add insult to injury, Japan is not a rich country regarding commodities in general, so it needs to import a very big share of the raw materials used by their industry. The actual commodities rally we live in could be a heavy stone in Japan's way up.
Another problem that comes to mind when you see the aforementioned list of Japanese companies is the main sectors they compete on. Car and machinery manufacturing on one side and electronics are the main players, unluckily two of the sectors that are not expected to grow specially in 2011, see earlier report in this same blog. Increasing competitiveness on these sectors will be though. Here is where the already mentioned Yen depreciation could shed some light, making Japanese exports more appealing to the rest of the world.
As the title of the article suggest, this will be an uphill battle for Japan. The actual scenario in the world economy is not the best possible to perform a miracle recovery, but Japan is a strong and hard-working country, so I am sure they will find a way to emerge from their problems. Remember they are called The land of the rising sun.
 |
| Credit: Yahoo! Finance |
Japan's instruments for recovery
Japan's economy is one of a kind, after booming heavily during the eighties, it entered a phase the Japanese call "The lost decade", stagflation after their asset bubble burst has plagued the economy since then. The global crisis we have been suffering since 2008 has not helped Japan totally get out of their slump at all, even though before said crisis Japan showed promising signs of recovery with GDP growths better than Europe or the US. Still, Japan is the world's third biggest economy after USA and China so it will not be bare-handed through its long, hard, recovery.
Starting this short analysis of Japan's instruments for recovery we have the Yen, a respected and solid currency that can give the Japanese government some room to maneuver. With the Yen we may be in front of Japan's main weapon for recovery, as it offers margin for depreciation if needed. Depreciation could help boost exports if needed (more about that later) and it is the first option that comes to mind for a country in search of growth so you can count on that. On top of that, Japan must not fear immediate inflation, after having had deflation as a travel partner for many years...
The first reaction after the quake has been the opposite though, the Yen has gone up slightly against its most significant pairs, the USD and the euro, maybe in preparation of what is to come.
 |
| Credit: Yahoo! Finance |
 |
| Credit: Yahoo! Finance |
What about lowering interest rates as an instrument to ease credit and boost growth? Well, there is not much to talk about here, as the Bank of Japan fixed a 0.0% interest rate long time ago, they have their hands tied in this aspect. The recovery will not come from easier credit, that is simply not possible. What Japan must be worried about right now is keeping the credit flow going after the disaster, and to ensure that the Bank of Japan has been injecting liquidity in the markets without hesitation since the earthquake.
Debt issuing. The go-to solution for careless European governments will not be the first option here neither, as Japan's debt to GDP ratio is already 200%. Issuing more debt would only aggravate the country's already existing problems. On top of this, rating agencies are expected to lower Japan's rate due to the catastrophe, which would make issuing debt more expensive than it is now. In fact the Bank of Japan has already announced they will be intensifying bond-purchases to control their public and corporate bond yield's not going up indiscriminately.
Economy growth. Japan has one of the strongest industrial networks in the first world, with companies such as Toyota, Panasonic, Sharp, Mitsubishi, NTT Docomo... that should make recovery a little bit easier, but their companies are already among the most optimized. They are frequently used as an example of good management and production methodology so there is not a lot of room for fast improvement there. To add insult to injury, Japan is not a rich country regarding commodities in general, so it needs to import a very big share of the raw materials used by their industry. The actual commodities rally we live in could be a heavy stone in Japan's way up.
Another problem that comes to mind when you see the aforementioned list of Japanese companies is the main sectors they compete on. Car and machinery manufacturing on one side and electronics are the main players, unluckily two of the sectors that are not expected to grow specially in 2011, see earlier report in this same blog. Increasing competitiveness on these sectors will be though. Here is where the already mentioned Yen depreciation could shed some light, making Japanese exports more appealing to the rest of the world.
As the title of the article suggest, this will be an uphill battle for Japan. The actual scenario in the world economy is not the best possible to perform a miracle recovery, but Japan is a strong and hard-working country, so I am sure they will find a way to emerge from their problems. Remember they are called The land of the rising sun.
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