Nikkei Veritas – Market Eye column, 28th September 2011
Having been writing for this column for, I think, 20 years, I expect this to be the last one. I will therefore start with sending my best wishes to my readers, whom I hope are many. As it is the last one it should and will be a serious one. Japan can, I believe, break out of the malaise that has afflicted its economy for the last 20 years.
Japan is beset by bad advice, particularly from foreigners. The key to economic recovery is to stop the yen strengthening and if possible to weaken it. This can be done by intervention and, as your new Prime Minister, Mr Yoshihiko Noda, seems to think that this is the right policy, he should be encouraged to act in accordance with his instincts.
There is a widespread assumption that individual countries should not run current account surpluses or deficits. There is no justification for this. It amounts to assuming that every country has the same wish to save and consume. This is no more true of countries than of individuals. Some people and some countries are more extravagant than others and the improvident will borrow from the provident. As Japanese people do not admire extravagance, the natural result is that they will save more than most people and will need to export part of their savings. As the export of capital is the same as the current account surplus, this means that Japan naturally runs a large current account surplus.
The major error of Japanese policy over the past 20 years has been to try to offset this natural savings’ surplus with a large government deficit. This was a mistake, but it worked for a time. A government deficit amounts to negative savings, since the public sector spends more than its income, and this reduces total savings. Now that Japan’s national debt is over 200% of its GDP, the time has come to stop running huge deficits. This does not have to happen immediately. This year and next Japan can absorb lots of savings through the necessary process of rebuilding the devastation caused by the Tohoku Daishin.
By 2013, however, the budget deficit must start to be reined in. The result must be that Japan’s savings will naturally rise. This does not mean that they will rise, as the natural process could be thwarted by a recession. This can only be avoided if Japan invests more to match the rise in savings. In theory these investments could be made within Japan or overseas. In practice only the second of these is likely, as Japan already invests much more of its GDP at home than other developed countries. This is already too much as Japan, because of its falling population, has a relatively slow growing economy even by other G5 standards.
As we look forward to 2013, Japan will need a marked rise in its current account surplus if it is to avoid falling back into recession and this means that its export surplus must rise. In order for this to be possible, two conditions are necessary. The first is that Japanese companies will choose to invest abroad rather than at home, which will allow the export of capital to rise. The second is that the exchange rate will be weak enough for the export surplus to rise.
The first condition seems to present little, if any, problem. Japanese companies are increasingly aiming to invest abroad rather than at home. This trend was clear before the Tohoku Daishin and has been encouraged by it, largely because the supply disruptions that resulted have underlined the risks, both to the producers and their customers, of depending solely on Japanese sources of output. In the first seven months of this year there have already been 361 Japanese acquisitions overseas worth $46.6 bn., which is 1.4% of GDP.
The second condition is that the yen is competitive enough for Japanese net exports to expand. This can happen in one of two ways, only one of which is benign for Japan, but the impact on the rest of the world will be the same, either way. The benign route is for the yen to be weak or at any rate not to be strong. The other is for Japanese wages and prices to fall sufficiently for Japanese exports to be competitive, whatever the exchange rate.
It is, I think, essential for the future wellbeing of Japan that the yen does not strengthen and I hope that your government will, if necessary, intervene like the Swiss, to prevent it.