By: Dr. Mike Campbell
Japan is an exporting nation. The demand for Japanese products and services is such that the nation has the third largest economy in the world after the USA and China. Since the global financial crisis struck, Japan’s currency, the Yen, has strongly appreciated against other major currencies; for instance, before the crash the Euro was trading above the 170 Yen mark – in the depths of the Eurozone sovereign debt crisis, that exchange rate had plummeted to 97.25 Yen to the Euro! The reasons behind this meteoric rise are that when the crisis hit, many debtors repaid Yen loans immediately to cash in on the low value of the Yen; loans were very attractive because of the near zero interest rate policy that the Bank of Japan was (and is) following. The second major reason was that during the financial firestorm, Japan was judged to be the best safe haven currency. This fact caused a large inflow of foreign currency to the Yen, pushing its value ever higher. A strong Yen hurts Japanese exports by making them (relatively) more expensive; it also means that foreign earnings are worth less when repatriated to Japan.
On the 11th of March 2011, Japan was hit by the most devastating earthquake and tsunami in its recorded history. The disaster destroyed significant parts of Japan’s infrastructure and precipitated a major incident at the Fukushima nuclear power plant when cooling to shutdown, but thermally hot, reactor cores was lost. As a result of this accident and as a precaution to check for any damage to the nation’s other nuclear power stations, almost all of the nation’s nuclear power was taken off-line. Damage to infrastructure and power shortages had a devastating effect on the nation’s exports with car production very hard hit. Against this backdrop, it is perhaps easy to see why Japan’s car exports are up by 36.6% from last year’s figure.
Since February, the Yen has eased against other major currencies, falling back from an 8% depreciation against the Dollar. This has helped to boost demand somewhat in the USA with sales of light trucks and cars up by 13% in March. Overall, Japan’s exports rose by 5.9% in March year-on-year (the effects of the disaster took a while to feed through). However, imports also rose, by 10.5% and this has resulted in a shortfall in the balance of payments by $1 billion for March – due in the main to increased purchases of fossil fuels to cover the shortfall of electricity production due to the mothballing of nuclear capacity.