Yen, Dollars, and the Subprime Crisis

In recent weeks the Japanese stock market has suffered declines even greater than the American and European markets. At first glance, this might seem somewhat puzzling. Japan’s banking system has had little exposure to the sub-prime mortgage mess, and Japan’s consumers have an estimated $15 trillion in savings. Japan would appear to have relatively few worries compared to America and its imploding banking system and skyrocketing unemployment. To a degree the fall of the Japanese stock market can be attributed to concern over the weak state of the American and Euro Zone economies, together which account for over a third of Japan’s export markets. However, if one takes a closer look what is really scaring Japanese traders is something that America traders usually welcome with joy: currency appreciation. Since the beginning of the financial crisis in October, the Yen has increased about 30% in valuation vis-a-vis the dollar, and even more against the Euro. Why is this giving Japan such a scare? The origins of the Yen’s current appreciation are closely tied to the origin of the sub-prime crisis and America and Europe’s current financial woes. A stronger Yen is likely to damage Japan’s economy in the short run, however, it is probable that it also signals a shift to more consumer purchasing power in Japan, which may be good news for the rest of the world.

As I discussed in my first post, Japan’s banking system is propped up by an enormous sum of money saved by Japanese households. In fact, Japanese households save so much money there has been a chronic and massive excess of money in Japan. As can be seen here, even after loans there is colossal excess of 145 trillion Yen held by Japanese banks. In order to put this money to productive use banks invested huge sums abroad; the majority being used to by US dollars and debt. In this way, Japan’s over saving problem helped to feed America’s over consumption problem. The Japanese government allowed this to go on because it pushed the Yen’s value down versus the Dollar and EURO. The cheaper the Yen became, the more competitive Japanese exports became, allowing Japan to increase trade surpluses even as its imports skyrocketed . Both of these contributed to the deteration of the U.S. economy of the past several years.
American politicians constantly tout the need for a stronger dollar, demonstrated by the "strong-dollar policy" of the past twenty years. As recently as February of this year, even President Bush, who has presided over the largest deficits in American, history claimed, "We believe in a strong dollar policy...and in the ability of the economy to grow economically."However, they are mistaken in their assumption that a stronger dollar means a stronger economy. A stronger dollar has made U.S. manufacturing exports increasingly uncompetitive abroad, while increasing the competiveness of foreign imports. A prime example is the rapid detorioration of the American car industry, not only abroad, but within the U.S. as well. At the same time Japanese cars have virtually conquered the U.S. and European markets. That is not only because Japanese cars tend to be more fuel efficient and suffer fewer break downs, but because they been very cheap compared to American made cars. This same logic can be applied to a variety of Japanese products that are edging out their European and American competitors such as computers, driers, washers, televisions, cell phones etc. Japanese corporations reinvested their profits, leaving cash to spare in the banking system. The spare cash found its way back to the U.S. feeding American’s borrowing binge, even as U.S. manufactures sold less overseas. That brings us to the financial crisis and the current strengthening of the Yen.

The rapid strengthening of the Yen versus other currencies is evidence of Japanese investments returning from abroad, and is likely to lead to a decline in the enormous Japanese trade surplus. As the financial crisis has made American and European assets increasingly risky looking to investors, investment in the Yen has increased. Additionally, Japan’s banks are recalling their investments from abroad. The rise in the value of the Yen coupled with the global downturn will lead to a sharp contraction in the size of Japan’s trade surplus. However, a stronger Yen, while hurting exports, will further increase the buying power of the Japanese consumer. Although a contraction in exports will hurt Japanese businesses, the Japanese consumer should be able to enjoy unprecedented buying power. This might provide a bit of a cushion for American and European businesses that export to Japan. If the Japanese consumer uses that buying power to purchase more imports both the European and American manufacturing. The Japanese consumer has reputation for being frugal, and the news of a global down turn will only enforce these habits. Time will tell if the strengthening of the Yen will be a win- lose situation, or ultimately reenforce an already deep global downturn.

Japan on the Net：A Spectrum of Resources

For this week's post, I have expanded my link roll to include twenty high-quality websites and blogs that will supplement my own writings on the blog by allowing readers greater access to related subject matter on the web. In selecting the links, I tried to apply the criteria provided by the Webby Awards and IMSA. In addition to a great deal of high quality economic and finance sites related to Japan, I was also able to discover a few high quality sites pertaining to cultural items such as music, fashion, manga, etc. Since the topic of my blog is Japan's place in globalization, these sites are particularly important, but quality sites are relatively rare. The sites I added to my link roll are either blogs, online affiliates to magazines, government sites, NGOs, and private companies. The provide a wide range of focuses: with some more closely aligned with the global, financial side of my blog and some focusing strongly on the cultural, Japanese focus of my blog. I tried to select sites that were visually stimulating, user friendly, organizationally adept, and with engaging content. All of the sites I found are posted in the link roll, to the right. Below, I will critique the sites in two loose groups, those sites that deal with political/economic issues and those dealing with cultural issues. Additionally, a link will be provided for each site as the title of the site below.

The first site is Asia Policy Point, a professional looking site provided by an American think tank relating to topics concerning Japan and Asia. The site is notable for its clean, scholarly design and ease of use. Content wise, the site provides solid information and commentary concerning more controversial issues involving Japan such as: comfort women and Japanese nationalist movements. Asia Society provides a variety of valuable speeches and interviews with leading academics in the realm of East Asian Studies. The site is also notable for it's visual display. East Asia Forum was one of the first blogs I found that discussed Japanese issues through a strong academic lens. The authors are all strong in their respective fields, with several notable academics including Drysdale and Zhang. While the site also uses the work of several graduate student writers, it obviously has a strong editorial office since all of the work is of excellent quality. The inclusion of a few graduate students on this site provides an outlet for up and coming opinions on many issues, and a comfortable environment for other students to share their own opinion. I think that feature is of particular importance in engaging the reader and creating Fairer Globalization is a blog that deals with issues pertaining to globalization. In Asia, is a blog hosted by the Asia Foundation, it has frequent, well-written postings. J@pan Inc. provides a wide variety articles on " Business Technology People". The major problems here are a some what confusing interface and confusion presentation. The look of the site is also somewhat dated looking. The Japan Center for International Exchange is a nice looking site, however it is somewhat sparse on hard content. It mostly serves a portal to articles and summaries of conventions concerning Japan. The Japan Economic Foundation is a great site not only for current economic news, but great articles that pursue current issues to a deeper level. Managing Globalization is a blog run by the International Herald Tribune, focusing on current global issues. This is an excellent example of a blog: providing well written content in a user friendly environment. Furthermore, the site design is professional without being boring, and devoid of tacky advertising that could detract from the focus of the blog. The Office of the Prime Minister, The National Diet, and The Bank of Japan sites provide a wealth of information on Japanese government activities, and finer points of policy not reported in major news outlets. Of the three sites, the Office of the Prime Minister and The Bank of Japan have the most effective sites. Both sites provide a great deal of information, as well as lively graphics that draw the user in. The National Diet site provides a great deal of valuable information, however, it is presented in a dense forbidding manner that discourages the user from exploring the site.

J-Pop Asia is a blog providing video, music, and lyrics to a variety of Japanese popular music. This site is notable for the sheer quantity of material it provides, and the forums it allows for discussion of that material. However, the site, since being for profit, is marred somewhat by tacky ads. Japanese Streets provides a large amount of information, including pictures and magazine scans, about Japanese youth/fringe fashion. Tokyo Street Style is also a site dedicated to Japanese fashion. However this site shows more mainstream fashion, provided by catalogs of snapshots taken of pedestrians. Tokyo Neo Style provides a look at individual's fashion, and also excels in providing more information about their models. It should be noted, that Tokyo Neo Style has more content on its Japanese version. The information on the English site, while understandable, occasionally is awkwardly phrased. The addition of video files is also noteworthy. Takashi Murakami is a site dedicated to the artist of the same name. He is notable for his pop-art, which was recently used for the album cover of Kanye West's Graduation album. Unfortunately the site is someone aesthetically flawed due to side bars full of google ads. Trends in Japan attempts to present a wide spectrum of new trends occurring in Japan. The site has a slick, modern appearance that lends itself to the newest, if at times trivial, trends. Web Japan provides a broad spectrum of information concerning Japan. Unfortunately the site's design is somewhat old-fashioned, and detracts from the contemporary nature of its content. However, the large amount of information provided, including a large amount of video files, help to make up for drawbacks in appearance. Overall I was somewhat surprised by the breadth of content available on the web about Japan, and I found quite a few really top notch sites amongst them. I found these sites noteworthy because, unlike many sites focusing on Japanese pop-culture, they did not attempt to emphasize or play up bizarre facets. In particular, I think I enjoyed Tokyo Neo Style and Tokyo Street Style for their unfiltered presentation of Japanese fashion. I look forward to keeping up with these sites as they develop, and using them as valuable resources for my posts in the future.

Searching for a Cure: Financial Sector lessons from Japan

As the meltdown of the U.S. financial system continues apace, building on the already considerable losses from earlier in the year, the looming questions are “what went wrong?” and “ how do we fix it?” Each day the magnitude of the crisis seems to be getting worse. The tally reached a benchmark of $379 billion in July of this year, and is now estimated to have losses easily surpassing the trillions of dollars. In short, this is the worst financial crisis the U.S. has faced since the stock market crash of 1929. We now have to reevaluate what the real purpose of the U.S. financial system is, and what degree of regulation is necessary to achieve that vision.

Since the Japanese economic model was dismissed in 1989, the U.S. has been the predominant economic and financial model: advocating free markets and even greater liberalization of capital markets. The U.S. vision for the financial markets was one in which government played little to no regulatory role, where the markets would ultimately decide the direction of capital flows. In contrast to the U.S. model, Japan long advocated controlled use of capital through coordination between the government, banking, and industrial sectors. However, while Japan’s economy has quietly grown at a modest pace of 1-2% over the past 17 years, it has been outpaced by the stellar growth that the U.S. economy registered during the same period. In fact, when one takes a deeper look at the existing data a much different picture emerges as to which economy was better serviced by their respective financial systems.

With the gradual deregulation of the U.S. financial system, the economy adjusted to increasingly plentiful lines of credit by beginning a binge of borrowing. Not only did the U.S. government accrue debt at an alarming rate, the average American household used easy credit by borrowing against the value of their house, to fund a 15 year spending spree. At the same time, despite high economic growth, there has been a steep rise in income disparities , and due to rising prices, an actual decrease in living standards for the majority of Americans after 2001. This created an American economy that relied too heavily on credit borrowed from abroad and one too heavily focused around financial services as a basis of the economy.

Although often criticized for growth rates that were considered too sluggish, during the same 17 year period Japan's economy managed to increase its trade surplus, household savings rates, and standard of living. Notably, such developments occurred in tandem with a reformation of the banking sector. The Japanese financial system is based on managed and cooperative use of capital. This involves cooperation between the government, large banks, and large companies to direct capital to towards areas of the economy that need capital. In a word, the Japanese financial sector still functions as a market, as the big banks still function in respect to profit, however the use of their money and speculation is more closely monitored than in the deregulated American system. The goal of the financial sector is not simply to make a profit, but also to direct capital toward developing industry for the purpose of international trade. Additionally, instead of using primarily foreign capital, the Japanese system relies primarily on domestic capital created through household savings. This means the individual savings of Japanese families are put towards developing the national economy in contrast to the American system where foreign money fueled consumer spending.

The Japanese system can hardly be called perfect, and has suffered its own serious downturns such as in 1989. However, the United States has suffered no more than three serious financial crises in the same period, with the current one being by far the worst. Alan Greenspan, the former head of the Federal Reserve Bank called it, " A once in a half century, probably once in a century, type of event." A financial system that is highly unregulated poses just as much of a danger to our society as a source of capital to help our economy grow. In particular, in the age of globalization, where the internet provides lightning fast communication, a deregulated financial system can too easily be misled by incorrect information and speculation.

Last week, the negative effects of speculation were clearly evidenced when short selling nearly forced several large investment banks such as Morgan Stanley into bankruptcy, despite their performance not being quite that bleak. In a deregulated system, we are more likely to see financial crises driven by greed, such as the current sub-prime mortgage crisis. They are more likely to spiral out of control as speculation forces even financially sound companies to their knees. The proponents of this system point to the vast amounts of capital it can make available for use, however, the use of that capital make a profit has negated the benefits it offered. In short, this system of finance is not one that has served our nation well: it has led to a massive accumulation of household debt, the erosion of industry, and a destructive wave of defaults that threaten the very foundation of our nation's economy.

In order to return the American economy to health, the instability of the financial system must be resolved by a degree of re-regulation by the government. When the Japanese Finance Minister, Eisuke Sakakibara predicted the current crisis in American financial markets he stated the reasons as being, "that the global capitalism we now have is inherently unstable, and... We don't have the international mechanism to really prevent a crisis or to manage them when they occur." Therefore, the U.S. government, particularly the Federal Reserve Bank, must take a leading role, akin to Japan's Ministry of Finance and the Bank of Japan, in the regulation and direction of the finance industry. It is of profound importance that the financial tools available to raise capital for the economy are regulated and establish specific rules for the trading of such equity. Primarily the dependence of the U.S. economy on large investment banks should be broken, and those companies should be strictly regulated. Additionally, that system where over-consumption is encouraged through artificially low interest rates and excess capital is put to an end. Instead a policy the encourages savings by limiting access to easy credit such as mortgages, credit cards, and other forms of commercial borrowing for consumption. With higher savings the U.S. will have a decreased need on foreign capital to both finance our debt and to provide capital for business. Increased savings will also provide a considerable bulwark of funds both nationally and within the banking system itself with which to protect against further financial crises. Although there may be little we can do to correct the current crisis and the impending economic recession, through smarter regulation and coordination between the government, banking sector, and industry we might just be able to secure a better and healthier American economy for generations to come.