SINCE taking office in December, the Japanese Prime Minister Shinzo Abe has been determined to throw everything he can at his economy to try to get it moving again. As well as a massive ¥10.3 trillion (£72bn) government stimulus package, the newly-installed Japanese government has fixed the strong yen in its sights, and has made it a major policy objective to weaken the currency in order to try and give struggling Japanese exporters a helping hand.
Many have rightly questioned these interventionist policies. Whether or not you agree ideologically with the concept of currency controls, the Bank of Japan is notoriously bad at executing them. And so, if you want to take a bullish position on Japanese exporters, you have to ask yourself whether things will be different this time.
For the last couple of years, the Japanese domestic economy has had a woeful time of things. The likes of Honda, Panasonic, Sony, Nissan have all taken an absolute hammering.
Beyond the story of a Chinese slowdown, alongside European and US uncertainty weighing on demand – a common factor in all bear markets – these companies also suffer from deeper problems that have sandbagged Japan’s recovery.
The first is cultural. The Japanese have a higher propensity to save than in the West. And while this may be all good and prudent, it is bad news for an economy dependent on the velocity of the money supply and on consumer spending. Every yen stored in the bank is a yen not being spent in the shops on electrical goods, on cars and other goods that Japan produces domestically. The Bank of Japan has tried everything to make Japanese consumers spend savings. They have slashed interest rates to make it less attractive to keep money in the bank, and have done everything else short of putting yen directly in consumers’ hands and frog marching them to the shops. But the Japanese just will not spend.
The second issue, and the one currently in the cross hairs of the Japanese government, is the currency. At the same time as consumers in Japan not spending, the strong yen relative to the dollar and the euro makes Japanese exporters less competitive.
There are many who argue that Japan can live with a strong yen, and that it is a waste of resources for its central bank to keep fighting yen strength. But while there is certainly some post hoc ergo propter hoc in the comparison, the decline in Japan’s benchmark equities index, the Nikkei, has gone hand in hand with yen strength.
Should the Japanese central bank intervention succeed in weakening the yen and so help these exporters, there could be some real value to be had among the Japanese large cap manufacturers. They are largely in very strong cash positions but have been hurt by the weak domestic market. But this takes a pretty big leap of faith in a central bank with a poor track record. Will it be different this time?