Currency - Japan

Based on an online article from The Star on 17th February 2012, it has stated that the Japan's economy is set for return to growth. Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. When markets fail to allocate resources efficiently, there has been market failure. During a market downturn, government can actually intervene to improve the market outcomes to promote efficiency and equity. Government intervention is actions on the part of government that affect economic activity, resource allocation and especially the voluntary decisions made through normal market exchanges. Government, by its very nature, is designed to intervene in voluntary market activity. Some of the more common types of government intervention include assorted regulations, taxes, price controls, and control over government spending. The general justification for government intervention is that voluntary decisions by consumers and businesses fail to achieve efficiency or other goals deemed important by society.

A poll by Reuters showed on Feb 17 that Japan will recover slowly in 2012 after March 2011 earthquake and tsunami. Japan, the world third largest economy according to CNN, set for economy to growth by spending money to its currency market, rebuilding disasters areas, and so on. Japan government plans to spend 18 trillion yen which is around $230 billion on rebuilding the devastated areas of the northeast coast after March disaster and the Fukushima nuclear crisis. With the helped of domestic demand and reconstruction investment, Japan’s economy will archive 1 percent growth starting on April in fiscal 2012/13.

Japan government steps into the currency market in order to save yen since it has been weakened to more than a three months low against the dollar. They have spent a record of 8 trillion yen in unilateral intervention on Oct 31 and another 1 trillion yen in early on November into the currency market. The policymakers afraid the manufacturers move their production site to oversea because of yen’s week strength squeezes exporters’ profits and cause a decline in the competitiveness in Japanese goods. While Japan is reconstructing the tsunami zone, if the yen continues to surge, it could negatively affect Japan’s economy and financial stability. As such, Government intervention of Japan is involved in the currency market. The falling U.S. dollar has hit the Japan’s economy hardly which is still struggling after the March 11 earthquake, tsunami and nuclear crisis. The investors see the currency of Japanese yen as a safe haven because uncertainty by global markets over the U.S debt deal led to the plummeting of dollars versus the Japanese yen. Japan’s exporters get a major headache when the yen rises ruthlessly, inducing major automakers and others to speed up plans to shift production overseas at the expense of direct exports. Exports have been declining as the yen remained strong. On the other hand, labor market has been hit and it is more difficult for the economy to conquer deflationary pressures. For every 1 yen movement up versus the dollar, Toyota, the world’s largest automaker reckons  an approximate loss of $385 million.

Japanese Yen v US Dollar

Japan’s economy was the envy of the world, this Asian tiger had ranking first in GNP per capita in the late 1980s. Japan’s lost decade is caused by the slow act of limiting the scope of the crisis. The Bank of Japan was slow to intervene, investors felt less confident and thus the problem is amplified. Japan’s debt was a primary factor in its lost decade. Debt must be reduced on all levels. The Euro debt crisis is the greatest risk for the economy of Japan. The dollar has gone down below 80 yen recently due to renascent concerns over the European debt crisis, even though a credit easing by the Bank of Japan in February lifted the dollar above 84 yen. Japanese exports become less competitive due to a stronger yen and what is more the value of Japanese firms’ foreign income decreases.

Japan’s central bank strengthened its efforts to spur economic growth, following similar steps by central bankers in the United States and Europe. The Bank of Japan declared it would boost the size and duration of a government bond-buying program that has the intention to uphold borrowing and spending and make Japan’s exports more competitive. The Bank of Japan said it would spend an extra 10 trillion yen on short and long-term government bonds and bills. Besides, the bank also removed a minimum required interest rate on the government bonds it buys. Japan has also been undergoing issues for years such as deflation or falling prices, which can be a drag on economic growth. The Bank of Japan’s extra bond purchases could contribute to the declining in prices.

Japan’s core inflation has been negative for three years and it was negative 0.3 percent in 2011. If the politicians take the Bank Of Japan (BOJ)’s decision on price stability as an inflation target, the political pressure for further easing will probably increase. The hurdle for additional easing has been lowered. This shows that the policymakers can stable the price of goods and increase inflation by taking BOJ’s decision.

On the other hand, Japan central bank said under the political pressure to support the economy, surprised the market on Tuesday by saying it would bring out its asset buying programme by 10 trillion yen, signaling a more hegemony monetary policy to drag the country out of deflation.

In conclusion, what Japan government did is government intervention which can save the market for deflation. Japan government spends 9 trillion yen in currency market, 18 trillion yen to rebuild the devastated areas, consider taking the BOJ’s decision which can save Japan out from market break downs.

*Random fact: Half the population of the world earns only 5% of the world's total wealth.

By Cheong Wai Kit