By: Dr. Mike Campbell
Japan’s economic fortunes rely heavily on exports and the nation is almost totally reliant on external sources for the raw materials and fuel that it needs. A high Yen means that the cost of imported goods falls, but it means that exports become less attractive since they are higher and it also drives up the manpower costs component on a relative basis (even if a Japanese worker’s pay is not increased, the stronger Yen means that foreign workers become more competitive on a cost basis).
For many years, Japan has been suffering from deflation – falling prices – whilst one might imagine that this turns the country into a consumer’s paradise, it means that domestic demand is stifled because people defer large purchases in the knowledge that the costs will be lower in the future. Federal Reserve Chairman, Ben Bernanke, provided a clear explanation of the reasons underlying deflation: “The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.” With this in mind, the news that consumer demand has increased above expectations is surely welcome.
According to the Japanese Trade Ministry, retail sales rose by 3.5%, year-on-year in February which was a much stronger performance than the 1.3% analysts had expected. The news helped the Nikkei 225 to climb above the pre-earthquake level for he first time this week. However, economists caution that pessimism over (relatively) high unemployment is likely to dampen consumer spending moving forward and point out that government incentives on fuel-efficient car purchases and other subsidies may have helped to boost the figures.