Japan’s Economic Countermeasures:
Too Little, Too Late or Not Relevant?   

• While Japan’s economy was supposedly more insulated from the global credit crisis sweeping through North America and Europe, there is no doubt that Japan’s economy and corporate profits are rapidly deteriorating. Japan is also closely watching the wrangling in the US Congress regarding a bailout of the big 3 Detroit automakers, as continued delays in producing a rescue package could slam-dunk GM before the end of the year.  Japanese stocks tanked and the yen soared on Friday as news that the US Congress had failed to agree on a rescue plan.
• Bank of Japan Governor Masaaki Shirakawa recently stated the obvious in warning that economic conditions in Japan were deteriorating rapidly and that Japanese firms were finding it increasingly difficult to secure credit. The Taro Aso Administration and the Japanese government’s response to rapidly deteriorating economic conditions and worsening unemployment has unfortunately been predictably slow and tepid, resulting in a rapid decline in the Aso Administration’s approval rating among voters that threatens the tenure of the current administration, even if they manage to push through the second stimulus package in the short life-time of the Aso Administration.
• Fiscally, these efforts to keep Japan’s economy from “falling apart” will exacerbate an already heavy public debt burden that is more than 170% of GDP, making Japan the most indebted nation in the industrialized world.  The irony is that the yen continues to soar despite the rapidly deteriorating economy and massive public debt, which the MOF/BOJ feels virtually powerless to stop.
• Short-term, yen rate trends are largely self-generating, while medium-term, long-term drivers are global risk appetite, interest rat differentials and relative money supply growth. The recent surge in the yen is thus being driven by carry trade unwinding as well as a substantial shrinkage in US-Japan rate differentials from 350~400 bps to only around 155bps, as well as the prospect of an explosion in the US money supply versus static money supply growth in Japan. No economic countermeasures can counter this.

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