Macroscope | Why Japan is unable to arrest its economic decline, despite a weak yen
- As instruments of capital flight, Japan’s business corporations are largely responsible for the badly skewed yen exchange rate
- Japan ought not to be dependent on a weak currency. A stronger yen could deliver the wake-up call the economy needs
Kazuo Ishiguro’s poignant novel, The Remains of the Day, is all about genteel decline and that is perhaps a good way to describe the current state of Japan (the land of Ishiguro’s birth) as it slides into a sustained economic decline with the full impact being masked by a weak yen.
As JPMorgan’s Tohru Sasaki notes in a recent report, the yen is now the “weakest currency among majors by a clear margin”. In real effective exchange rate terms, the yen is back where it was in the 1970s. This means, according to Sasaki (formerly with the Bank of Japan), that although the yen now stands at around 109 to the dollar, the yen-dollar rate should be nearer to 69, adjusted for price changes.
Maybe currency watchdogs don’t care about real effective exchange rates. But the causes and effects of the anomaly of Japan’s case are of interest to anyone who wonders why its economy continues its seemingly inexorable decline.
A nation which once seemed poised to become the world’s leading economic power has instead seen export volumes fall despite a weak yen, and a reliance on cheap-yen tourism.
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