Wednesday, January 25, 2012

Japan’s Economy Moves Into a Trade Deficit – What Happened? - The Once Mighty Economy of the Pacific Slides Further into Decline

Those Politicians Advocating a Strong Dollar Need to Learn Basic Economics

Japan has always been one of the most mystifying countries of the past 80 years.  In the 1930’s militarism took over control of the country, and its brutal and viscious conquest of Asia only ended with the U. S. victory in WWII.  The country was devastated, but under the benign occupation of the U. S. it started to recover and by the last half of the 20th Century it was an economic power house.

But Japan has completed what appears to be the first 20 years of what may be a 50 year decline.  The economy is weak, the population aging, the budget deficit is running at a very uncomfortable amount and now the economy has moved from a net exporter of goods and service to a net importer.

Can This Be Happening?

Japan’s huge trade surplus was a popular target for American and European protectionists. No longer. Provisional estimates suggest that Japan’s merchandise trade moved into the red in 2011—its first annual deficit (excluding freight costs) since 1963.

How can this happen?  Easy, a weak world wide economy combined with a strong currency meant demand for Japanese goods was not growing as fast as it had in the past, and price of those goods was rising due to the strong currency.

Last year’s trade deficit partly reflected some temporary factors, notably the earthquake and tsunami which disrupted production and exports. Imports were inflated by higher oil prices and larger imports of energy following the shutdown of nuclear-power plants.

But if, as seems likely, many plants stay closed, future energy imports will remain high. The stronger yen and weak overseas demand will also keep squeezing exports.

And that strong yen has other impact as well

The stronger yen and high corporate taxes are also encouraging manufacturers to shift production abroad. J.P. Morgan forecasts that by 2014, 76% of Japanese car firms’ production will be based overseas, up from 49% in 2003. As well as curbing exports, this could also lift imports if some car models are only made abroad.

Now one lesson in all of this for America is that the term “strong” dollar is not necessarily a good thing.  Yes it is a good thing in politics, as politicians on all sides of the aisle pander to an electorate that doesn’t realize what a strong dollar means.  But candidates should remember that once you get elected you have to govern and you have to perform. 

As Japan shows, a strong currency may not be the way to go. The Japanese are pretty savvy, they know the strong Yen is harming their economy and the only reason they haven’t done something to fix it is because they cannot do something to fix it.  Of course by the time politicians learn that lesson in the U. S. it may be too late.

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