Japan: Praying for an American recovery

Japan’s closely watched Tankan report was released last week, a quarterly report of business sentiment, showing its sharpest drop in history, cliff diving from -24 to -58. Japan is the one nation that has profited the most from globalization, and is therefore the most severely punished now that it is in retreat. Exports have dropped by half, industrial production plunged 9 percent in a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable 3.2 percent, double the fall seen in the US. The last time the numbers were this bad, the first oil shock had just happened in 1974. Prime Minister Taro Aso’s government is embroiled in multiple scandals, taking his approval rating down to 23 percent, so the ruling Liberal Democratic Party’s half century long hold on power is in doubt. Elections are due in September. Perversely, a hurried unwind of a decade long accumulation of yen carry trades has pushed the yen up just short of a 20 year high of 87 yen in January, making the country’s essential exports even less competitive, and vaporizing the foreign earnings of Japanese companies. Toyota has been reduced to begging for bail out money from the government, GM style. The government has passed four bailout packages in the past year totaling 13 percent of GPD, none of which have so far been spent. Japan has little choice but to wait for a US economic recovery, and then grab hold of its coat tails for dear life.

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