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ANALYSIS: Japan’s economic troubles deepen as the yen soars

With world markets in turmoil, investors are flocking to buy the yen, but it is no vote of confidence in Japan’s economy, which faces several quarters of stagnation or recession, analysts say.

It was not so long ago that Asia’s largest economy seemed relatively unscathed by the financial crisis rocking the US and Europe, as Japanese banks snapped up stakes in ailing Wall Street giants.

But after the Nikkei plunged 24 percent in just five days, the worst weekly performance in its 50-year history, Japan has been shaken out of its complacency.

“Japan’s economy is now in recession and internal sources of growth have been exhausted,” RBS Securities analysts said.

“Capital spending is being depressed by declining earnings. Consumption is also feeling the one-two punch of depressed company earnings, which hurt bonuses, and also the impact of falling real wages,” they said.

On Friday the crisis brought down the first Japanese financial institution as Yamato Life Insurance went bust with debts of US$2.7 billion.

YEN UNDER PRESSURE

The stock market plunge has become a vicious circle for Japan, sending the yen soaring which in turn drives shares even lower because of the negative impact of a stronger currency on exporter earnings.

Toyota Motor, for example, loses ¥35 billion (US$350 million) for every ¥1 the dollar goes down, analysts say.

The greenback has lost about ¥8 over the past week alone, falling below ¥100 for the first time in six months as people dumped risky investments funded with cheap Japanese credit.

Upward pressure on the yen is likely to remain, at least until the end of the year, Royal Bank of Scotland forex strategist Masafumi Yamamoto said.

Unless markets respond positively to steps by governments to try to ease the crisis, the US dollar could fall towards its March low of ¥95, he said.

They was no sign of a bottom to the collapsing Tokyo stock market on Friday as the Nikkei plunged 9.62 percent — its biggest one-day loss since “Black Monday” in October 1987.

TOUGH BLOW

The financial turmoil and global economic slowdown is a heavy blow for Japan’s economy, which has relied heavily on exports to drive its recovery from a slump stretching back more than a decade, analysts said.

It is even possible that Japan’s economy will shrink this year as a whole, said Taro Saito, senior economist at NLI Research Institute.

“That was unthinkable a while ago,” he said.

The global economic slowdown is reducing overseas demand for Japanese cars, electronics and other goods. Japanese consumers, too, are likely to think twice about buying that new car or TV given the uncertain outlook for the economy and the jobs markets. Companies are also less likely to make big investments given the outlook.

Japan’s economy suffered its worst contraction in seven years in the second quarter of this year and recent economic data has offered little hope of a recovery any time soon.

Morgan Stanley economists warned Japan faces five consecutive quarters of zero or negative growth, while Japanese companies could suffer two straight years of double-digit profit declines.

LONG RECESSIONS

Recessions here have lasted 16 months on average since the end of World War II but steep cuts in industrial production mean “a more severe recession is inevitable this time,” the economists warned.

Unlike central banks elsewhere in the world, the Bank of Japan (BoJ) has little room to reduce interest rates to pump up the economy. At 0.5 percent, Japanese rates are already the lowest of the major economies.

“We believe that the BoJ can do little in the current crisis other than providing liquidity to the money markets to maintain financial markets stability,” UBS economists said.

“Expectations of a global recession, triggered by the global financial turmoil, should delay the recovery of Japan’s economy,” they said.
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