The Japanese yen’s recent run-up against most other currencies has investors perplexed. After all, Japan’s interest rates are close to zero and have been at that level for a long time. The Nikkei, Japan’s stock market, has been leading world markets lower this year and is now officially in bear territory. What is so attractive about the yen that it now trades at a 15-year high?
The short answer is investors are betting the country’s prospects can’t get much worse whereas the U.S. and Europe’s economies can and will decline further. Investors figure that the yen could be a safe haven currency, despite the damage an appreciating yen is having on the nation’s economy. Japanese export companies, such as Toyota and Sony, are feeling the sting and warned Japanese policy makers that the rise in the yen, if allowed to continue, will strangle the country’s export-led recovery and worsen deflation.
Japan has been grabbling with the aftermath of both a real estate and stock market bubble that was finally pierced in the late eighties. For over twenty years Japan has tried various strategies to raise their ‘zombie economy’ out of its deflationary malaise. The government’s basic approach has been a zero interest rate policy, coupled with an unending series of stimulus programs with another one in the works as I write this.
Fortunately for Japan (unlike the U.S.), the Japanese are habitual savers and have managed to finance two decades worth of government stimulus by purchasing government bonds. Picture a nation of savers with large nest eggs but little income who, year after year, have managed to maintain their life style by slowly selling off their saved assets. That’s the typical profile of a Japanese family. Along the way, a massive bond bubble has also developed.
The fact that Japan’s government debt is in the hands of domestic investors provides a lot of comfort to global players. There is little chance, so the reasoning goes; that the Japanese will sell their government debt holdings no matter what happens to their economy.
In comparison, trillions of dollars in U.S. government debt is owned by foreigners (almost half) who could flee in a minute with their capital if they perceive the future of America is less than perfect. That would drive up our interest rates and cause a crash in the dollar.
So, although Japan’s economy is far from robust, it’s most recent fractured government less than two months old (and has had five prime ministers in four years), it appears to be the lesser of two evils for skittish investors who are afraid of a global double-dip recession in the U.S. and Europe. Some perma-bears are predicting that the U.S. economy is heading for the same type of multi-year stagnation that now afflicts Japan. They point to our own real estate and stock market bubbles and their continued aftermath as proof.
However, there are differences between the U.S. response to our crisis and that of Japan’s. The Fed cut interest rates to almost zero three years after the peak of the real estate market, while Japan waited eight years. We also bailed out our banks much faster than the Japanese. Ben Bernanke, the present chairman of the Federal Reserve, has studied the “Lost Decades” in Japan and has actually written academic papers on what not to do in an environment like that.
The jury is still out, however, on the next phase of economic policy. Like Japan, we are in a period where banks are restricting credit lending while they work off a large portfolio of bad loans. In the meantime, Main Street consumers continue to pay down the excessive debt they have amassed over the last ten years.
As our economy sputters along at sub-par growth rates and unemployment remains uncomfortably high, the likelihood of additional bad debts in the form of consumer loans, mortgages and credit card debt will keep banks wary of lending. In this environment, most consumers don’t want to borrow anyway. The average American has a debt-to-income ratio of about 122%, which means the average amount of individual debt equals nearly 15 months of wages. That’s down from 133% in 2007, but historically that ratio has always been well below 100%. Consumers in today’s shaky job market are far more interested in paying down yesterday’s debt than acquiring tomorrow’s new ‘must have’ gadgets.
It seems to me that betting on an end of the world scenario by buying the Yen is a fool’s game. Despite the market’s present lack of confidence in the recovery, the government, the Federal Reserve and in this country’s ability to get through this rough patch, I remain confident in all of the above. As the stock markets skyrocketed last year in ‘excessive exuberance’ of future economic prospects, I warned that growth would be much slower than expected. That has now come to pass.
Yet a sputter here, a stumble there, does not a recession make. I have been expecting the market’s mood to turn dour. It has, along with a subsequent correction that should bring the market down to a value that better reflects this slow growth recovery that we are experiencing. That my dear reader is all that is occurring. So stop with the angst.