Is the Yen a SAFE Haven or a Ticking Time bomb?

Tips & TutorialsIs the Yen a SAFE Haven or a Ticking Time bomb?

Is the Yen a SAFE Haven or a Ticking Time bomb?

For several decades the Japanese yen has been perceived as one of the more robust and safe currencies, but is that perception correct? Only as far back as 1990 Japan was seen as a manufacturing giant responsible for approximately 10% of global exports, whereas today that figure rests at 4%. Over that same period of time China has become a force to be reckoned with figures there rising from 2% during the early stages of its market-based reforms to an impressive 12% of world exports today. Clearly there is a sea-change afoot.
In the last 20 years the only major financial crises the Japanese economy had to contend with resulted from the Great Hanshin Earthquake in 1995, closely followed by the Asian financial crisis in 1997 when the US$:JPY exchange rate rose beyond 140. On the other side of the financial coin, the Japanese yen has been a far more stable currency during the more-recent global financial crisis. With the US devaluating the dollar through Quantative Easing and the massive impact on the Greek economic crisis on the Euro, Japan‘s economy was perceived as being a safer bet due to its historical strength.

Japanese Economy’s 20 Year Decline

However, for the last 20 years the Japanese economy has been slowly and consistently on the decline. Living standards are 10% lower than they were in 1990. According to Marketwatch, “because of low productivity, massive government debt, a shrinking population and aging work force, [it is believed] Japan’s economy is so constrained that its growth potential is below 2% annually.” While China’s yuan, despite recent devaluation, is up 25% against the dollar over the last decade, in only the last three years the yen has fallen by over 30% and, despite that, Japan’s economy is only expected to grow by 1% this year. Worse still, Japan’s debt, as a percentage of GDP, is far greater than that of Greece and the biggest in any OECD economy. At 230% of gross domestic product, there has to be considerable concern over the consequences as servicing debt is the principal outgoing in the budget and that percentage has to rise when, not if, interest rates increase.

Japan’s Abenomics Aim to Turn the Demographic, Economic Tide

However, Japan’s economy is not just affected by its GDP and value of the yen. In 2013, in an effort to combat many of the ingrained societal problems in Japan, Prime Minister Shinzo Abe introduced what has become known as the Abenomics. The country’s demography has, over recent years, started to become a millstone round the economy’s neck, with the future looking bleak. Of primary concern is the fact that not only does the Japanese population enjoy greater longevity, but the birth rate has fallen. As a consequence, by 2060 it is estimated that 40% of the population will be over 65 years of age, and the economic burden on the working population will be massive. Abenomics aims at reversing this trend with the minister for demographic issues charged with raising Japan’s birth-rate, currently at an average 1.15 per head, to 1.8, with a view to stabilizing the country’s population at 100 million.
There would now appear to be greater effort being put into redressing the employment situation for women who seem to be treated unequally. There is the possibility of a more equal tax system to encourage more women the join the workforce, though this has been met with opposition from Abe’s coalition partner, Komeito (Clean Government Party). Additionally, while Japan’s lifetime employment system is still in effect for many, about 40% of the workforce, mainly women, are on an hourly wage or contract, and such jobs are traditionally very lowly paid. According to a Bloomberg article, Kathy Matsui of the Goldman Sachs Group Ltd feels that the country’s economy could grow by up to 13% if the number of women in work was the same as men, advocating more-flexible working practices and equal treatment for full and part-time employees.
Despite only 2% of the population being non-Japanese, Abe has rejected suggestions from economists that more foreigners should be accepted into the country; in the US and Germany that figure is 13%. Instead, while being more focused on the birth-rate, Abe also wants to tackle domestic problems, such as reducing to zero the waiting list for children to attend kindergarten in order to enable more women back into the workforce. He is also looking to reform care of the elderly. As of March 2015, 260,000 people were being cared for at home until space became available in a suitable facility, a situation not helped by previous subsidy reductions for nursing homes that are already understaffed.
Wage growth is to be encouraged through the reduction of the corporate tax rate from 32% to 30% in the hope companies will plough this money back into increased staff wages in a country where the unions negotiate hard and fair in private to avoid public disputes. This rise in wages would hopefully boost economic growth, though more will have to be done if that is to counteract the damage being caused by the hike in VAT from 5% to 7% in 2014, and an anticipated second hike to 10% in 2017.

Bank of Japan Stuck Between a Rock and a Hard Place

The 30% reduction in the value of the yen since 2012 has certainly boosted corporate profits and enabled Japanese goods to compete against those from companies in China and South Korea. With greater overseas sales comes the opportunity to receive US dollars, which can then be converted back into larger amounts of yen, which in turn can boost locally denominated profits. However, the weak yen has badly affected buying power where imports are concerned, such as food and energy. The result puts the Bank of Japan in the unenviable position of trying to strike a balance between too weak and too strong a yen such that neither consumers nor manufacturers suffer.
With an ever-ageing population and massive national debt, it is hard to see the yen providing any form of safe haven for investors in the near future – despite the mistaken perception of many investors. One thing is certain though, for the Land of the Rising Sun, 2016 is going to be a crucial year for its economy.