Uphill battle for Japan. How can they fight it?

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.

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.

ECB raising interest rates. Damage control?

Take a quick look at the news an see how many times the expression 'raising tensions' appears on articles lately when talking about the situation in the Middle East. I am sure you do not have enough fingers to count them... Now take this same expression but exchange the word 'tensions' by 'interest rates' and see everybody panic and run for their lives. Although we have lived (and we are still living) one of history's longest period of low interest rates, people keep asking for more. Governments and enterprises around the world have grown so accustomed to debt issuing and uncontrolled spending thanks to cheap money that mentioning the slightest interest rate hike makes them shiver.

The key factors to justify a (slight) interest rates raise are all there though: we have growing core inflation, uncontrolled energy prices, excessive debt and severely depreciated currencies. On the other side we have a weak, mostly artificial recovery (already mentioned), that depends heavily on the availability of cheap money. Which side has a more important impact on the future status of the economy? It is clearly the first one, no hesitation. The Middle East turmoil is not coming to an end soon, and until it does the oil barrel price will keep rising, putting even more pressure on inflation control measures.

More inflation in the actual scenario we are facing would kill all recovery aspirations on the medium and long-term, even if it now seems detrimental for the short-term.

Do not get me wrong, as of now, a raise in interest rates will be hard to handle, specially for debt-burdened countries like Greece, Ireland or Portugal. It would be bad for Spain too even if its debt situation is marginally better, because all the semi-public savings banks (called 'Cajas de Ahorros') are now undergoing reforms to transform themselves into normal banks. A process that needs, and will need, a lot of funding and bond issuing on their part. For these troubled countries higher interest rates mean only one thing: more expensive financing, that is all they can think of when they hear these words.