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Japan: Will the Yen follow the Economy Down?

publication date: Jan 27, 2009
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Longstanding readers will know that I have been a consistent bear of Japan, which is the first developed economy to pass the demographic tipping point into secular decline. Last April, when the economic and investment consensus was overwhelmingly bullish, I wrote in Japan: Land of the Setting Sun that 'Much of Japan's recent export growth has been generated by China's appetite for advanced engineering from machine tools to construction machinery (China is now Japan's biggest export market). I suspect China's growth rate will fall to mid single digits by year end; Japanese exporters will be among the biggest losers.'

 
In fact the stunning reversal in China's growth simply exacerbates the underlying cultural and demographic factors that have prolonged Japan's long growth slump. However, never since the Japanese economy peaked in 1990 has the outlook been quite this grim. The Nikkei index is back to where it stood three decades ago (and still yields a paltry 2%). Japan’s steel production fell 28 percent in December, the steepest decline in six decades. Industrial exports, which dropped by an astonishing 35% yoy in December, accounted for over 60 percent of GDP growth in the now curtailed recovery. I'm bearish on global trade for reasons explained previously, notably the tapped out US consumer finally saving a decent proportion of income to pay down debt which will have a domino effect across Asian exporters. For international investors the most interesting implications of Japan's renewed slump will be for the surging Yen.


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