Japan Loses Control Of Its Economic Future

It could easily be argued that almost every major country in the world, with the possible exception of China, lost control over their economies in 2008 and 2009. Some experts would say that “control” is a matter of degrees. The US may have effectively diminished chances of inflation and stabilized the banking system, but has not been able to change a struggling housing industry which continues to undermine economic growth.

Japan, however, has lost almost all control over its economy and probably its financial future. Is  Nikkei index fell over 3% overnight to a 16-month low, and attempts by the Bank of Japan to bring down the value of the yen have failed and it still trades above 85 to the dollar.

Japan has failed where some nations have partially succeeded. The nation’s largest companies may see nearly all of their profits wiped out this year because of the central government’s powerlessness. Exporters like Sony (NYSE: SNE) and Toyota Motor (NYSE: TM) have vigorously lobbied the Japanese government to bring down the value of the yen so that it does not destroy their ability to make money on products that they send to the US and Europe.

The efforts of the Bank of Japan are probably too little, and perhaps too late. With the yen at a 15-year high against the dollar, the investment of the central bank would have to be an order of magnitude larger than it is now. Part of the program to control the yen’s rise is a new 10 trillion yen loan facility for Japanese banks.

The domino effect of a high yen has already begun, and is likely to accelerate as global currency traders overwhelm efforts by Japan to control its currency. Large exporters will struggle as their profits disappear. They will need to lay-off workers and the amount of raw material and finished goods that they buy will drop, which will help fuel deflation. And, for the time being, the government has been able to do nothing to help reverse any of this process.

Douglas A. McIntyre