Japan’s economic crunch, its effect on the U.S.

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Growing concerns have compelled the Bank of Japan’s policy board to take significant steps to jumpstart its faltering economy. The bank calls its multi-pronged strategy a “comprehensive monetary easing policy.”

Statistics indicate that Japan’s economy is suffering from a combination of weakening exports and industrial production, as well as a tide of public opinion against Japanese corporations. Not long ago the government intervened in the currency market forcing the yen lower, giving the economy only a temporary boost. That’s why authorities reached out to the central bank for help.

"Although Japan's economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen's appreciation on business sentiment", a Bank of Japan (BOJ) spokesperson said in a statement.

One significant move the bank is making is to slash the nation’s key interest rate to a range from zero to 0.1 percent.


Will the BOJ’s actions help? 

Some industry experts are optimistic.

"It's a good move", Kyohei Morita, chief economist at Barclays Capital Japan, told the Associated Press. "All that they announced today is something that is beyond my expectations."

Junko Nishioka, chief economist at RBS Securities Japan, told the AP that with this new strategy, the bank has “made major progress.”

The rate cut brought an immediate result. The stock market Nikkei 225 index jumped 1.5 percent before the close of business, after languishing most of the day in the red. The BOJ pledges to keep the rate in place until prices begin to rise again – a goal they expect could take three to four years, Morita told reporters.

Other efforts include:

  • Prime Minister Naoto Kan says he will soon unveil a new spending plan through a supplementary budget, which should also boost the overall economy. The plan, said the AP, could be as big as five trillion yen.
  • In August of this year, the BOJ expanded its low-interest credit program. Plans are in the works to further beef up the loan program by offering another $359 billion (30 trillion yen).
  • A fund is being created in the amount of $60 billion (5 trillion yen) with which to buy assets such as government securities, commercial paper, and corporate bonds. Approximately 70 percent of the fund will go to the purchase of long-term government bonds and treasury discount bills. The bank hopes these purchases will stimulate the economy by lowering longer-term interest rates and risk premiums.

A major problem plaguing Japan is the sluggish economy in the United States. Japan’s economic recovery is heavily dependent on exports, but the demand from overseas has been disappointing. In August of this year, core consumer prices in the U.S. fell for the 18th month in a row as a strong yen pushed import prices lower. 


The news about Japan’s moves to bolster the economy was greeted by speculation that other central banks may act to ease their monetary policies as well, including the U.S.

Federal Reserve Chairman Ben Bernanke told reporters that another round of asset purchases by the U.S. central bank could be good for the economy. In early November, the Fed will meet to discuss a new plan to buy government debt with the aim of forcing down mortgage rates, corporate loan rates, and other debt. Since the beginning of the recession, the Fed has purchased approximately $1.7 trillion in government bonds, and mortgage securities and debt.


Will this help the U.S. economy?

Leon LaBrecque, managing partner and founder of Michigan-based LJPR, LLC, has his doubts. He told reporters at MSNBC that uncertainty must be reduced.

“There are several kinds of recessions: those which are caused by economic turmoil, by some endemic event as we have seen in 2008-2009, and those caused by fear, the fear caused by uncertainty,” said LaBrecque. 

“My mantra is ‘reduce uncertainty,’ and I see the current situation filled with uncertainty, which is pushing what I call a ‘behavioral recession.' What is a behavioral recession? It’s when the conduct of the components of the economy alter their economic behavior to the extent their fears are realized. Consider the three legs of the economy: government, consumer, and corporate. The U.S. economy is divided with about 60 percent of the U.S. GDP in the consumer, and 20 percent each in government and corporate spending,” he said.

LaBrecque pointed out that the federal government has been on a spending spree – and might be about to go on another binge – but state and local governments are pulling back spending, so, basically, government spending is a wash.

Consumers, which comprise the second leg of the stool, also are holding back. They are “rightfully frightened,” said LaBrecque. They are still earning income, but they are worried about employment and inflation, fearful that their taxes are about to spike in spite of assurances from the Fed that most Americans will not pay higher taxes.

Then there are the corporations. LaBrecque said that when the recession started in 2007-08, corporations began to cut spending, including jobs. They are profiting, “riding a wave of profitability and cash build-up.” What they are not doing he said, is spending, hiring, expanding, or merging.

Banks “are sitting on more money than ever in history,” he said. Why? Because nobody is borrowing. Nobody is spending. Instead, they are waiting to see what comes out of Washington.

"That leaves us with the fact that we have the three parts of the economy sitting around the campfire, looking at each other. The consumer is looking at the government and wondering when they’re going to make the economy better. Half of the government is throwing wood on the fire and half is pulling wood off the fire. The government is looking at corporations and wondering when they’re going to start hiring and get the economy moving. The corporations are looking at the government and wondering if they’re going to take away their pile of wood,” LaBrecque said.


Are we in a race to the bottom?

The downturn started here, and rippled through the world’s economies, including Japan. Now they are experiencing the aftershocks of our troubles, according to Brad McDonald, a columnist on Trumpet.com. Growth is slow or nonexistent, debt is soaring, industry is barely moving, and global unemployment is growing. The race is on, said some experts, to devalue their currencies, like Japan is doing now.   That makes their goods cheaper to import and, they hope, will start to breathe life back into their manufacturing.

Some industry analysts say that a deliberate attempt to devalue a country’s currency is like declaring war on other nations. When one nation’s goods are more affordable, the same industries in other countries lose their ability to compete and their own economies slump. To regain the advantage, those nations devalue their own currencies. Some call this a race to the bottom.

Japan’s move to lower the key interest rate and ease the monetary policy, driving down the yen, is, according to some, a move to help Japanese giants like Toyota, Sony, and Sharp remain competitive.   But it’s not only Japan.

Not long ago, the Brazilian finance minister was quoted as saying, “We’re in the midst of an international currency war. This threatens us because it takes away our competitiveness.” 

The Swiss franc also has been devalued as governments everywhere are struggling to keep their heads above water.

Some analysts fear that desperation will drive economies, including ours, to adopt nationalist financial policies. Doing so could further endanger the economic health of the global economy. If that’s the case, LaBrecque may have a better idea. Rather than the Federal Reserve manipulating the dollar, maybe it should focus more attention on reducing uncertainty within the sectors of our economy and start the blood flowing again.

The trick is getting one of three legs of the stool to go first.

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