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Business setbacks in the land of the Rising Sun

Posted by cij on Dec 15th, 2008

We quoted Marc Faber at Is the Warren Buffett way dead?:

Above I tried to show the existing connectivity between global liquidity (coming from the US current account deficit), asset markets, and currency movements. To navigate successfully between all these volatile and often unpredictable market movements you need to be a genius.

As we explained before in Real economy suffers while financial markets stuff around with prices, volatile movement in prices in the context of market movements will have tangible impacts on the real economy. One of the market movements is currency flow. Over the past few months, there had been a flight towards the US dollar, which in turn had a flight towards the Japanese yen through the reversal of the yen carry trade (we first mentioned the carry trade in Another source of potential financial crisis-reversal of yen carry trade). These currency movements resulted in a rising US dollar relative to all the other major currencies (except the yen) and the rise of the yen relative to the US dollar. Indeed, over the past 3 months, the US dollar had depreciated around 17% against the yen.

The rapidly rising yen is wrecking havoc on the Japanese export sector, which in turn has a serious effect on the Japanese economy. For example, as this news article from the Asahi Shimbun reported, Toyota budgeted a yen exchange rate of around 100 yen to 1 US dollar for the second half of this fiscal year to March next year. But for every 1 yen that appreciated against the US dollar, Toyota loses 400 billion yen of income per year. This unexpected appreciation of the yen is a setback for Toyota. Other Japanese export companies are finding themselves in the same predicament.

Japan was finally climbing out of the 18 long years of economic stagnation when the GFC struck. Now, they are falling back into the hole again. Looks like the Japanese are in the same boat as the Chinese with regards to their export sector.