Although Japan is still the numero dos economy in the world, this does not save them from their problems. As a result, the Land of the Rising Sun has dug itself a deep hole. Is the yen's strength coming to an end?
Among Japan’s economic problems, deflation seems to be the biggest and longest-running one. Japan has been trapped in a period of declining price levels even before the recent recession crippled their economic growth. In fact, this deflationary situation isn’t new to Japan. Remember their “Lost Decade” back in the nineties? During that time, successive price declines paved the way for easy credit and asset price bubbles.
Recently we saw a 1.3% decline in Japan’s annual core CPI, which could chalk up another drop this March. Its corporate services price index, which serves as a leading indicator for the CPI, came in worse than expected for the month. Since their central bank expects deflation to continue for five more years, could Japan be in for “Lost Decade: Part II”?
Another matter that has been choking Japan’s growth is the yen’s rapid appreciation. After topping out near the 100.00 price level last year, the USDJPY has been on a steady downtrend, hitting as low as 85.00. This of course, hasn’t escaped the BOJ. Since a large chunk of the Japanese economy comes from their exports, the Japanese government would much rather prefer a weaker yen, which would make their exports more attractive.
It’s no wonder that the Japanese government hasn’t been afraid of expanding their quantitative easing measures. Aside sparking inflation, increasing their quantitative easing programs also weakens their currency. Talk about hitting two birds with one stone!
The consistent drop in employee wages is another monkey on Japan's back. Back in December, Japanese employees saw their paycheck cut by 6.1% which at the time, was a record decline on a month-to-month basis. Wages were slashed to ¥549,259 as bonuses were shaved by 15%, which is putting downward pressure on consumer spending. With dwindling paychecks, the Japanese won’t be able to afford another round of their favorite sake!
Japan added about 130,000 jobs in December, causing its jobless rate to improve to 4.9% from 5.2%. It’s something to be happy about, right? Not exactly... Looking at the historical numbers, Japan’s jobless rate, excluding 2009, has not reached this level for about five years now. Besides, how can an uptick in employment do much help if wages are falling anyway?
To make matters worse, earlier this week, the Japanese government came out with a statement saying that their budget for the next fiscal year stands at a record high of ¥92.3 trillion. Just in case you’re wondering, this translates to $1 trillion, approximately a third of the US’ total stimulus programs. Considering the size of Japan in relation to the US, this amount is huge to say the least.
According to the Japanese government, this amount will be used to fund additional stimulus measures to help the country’s economy grow. These stimulus measures include providing money to households with young children as well as giving out extra income for agricultural farmers.
Deflation, the yen’s appreciation, falling wages, and a huge budget deficit… These are Japan’s four biggest adversaries .... Can’t Japan simply wield a samurai and ward off these economic foes? If Japan wishes to defend its title as the number two economy in the world, it's going to need to put a stronger fight!