Japan is currently facing a challenging economic landscape. In February, the nation marked its 20th consecutive month of trade deficits. Similar to the situation in the United States, Japan is importing more goods than it is exporting, resulting in a gradual decline in its wealth.
This situation was not anticipated, especially not during Prime Minister Shinzo Abe’s administration, which was characterized by policies aimed at boosting exports.
Since assuming office in December 2012, Abe has implemented an exceptionally loose monetary policy. This involved aggressive measures such as extensive money printing and maintaining a weaker yen, with the aim of revitalizing Japan’s economy that has languished for two decades. These strategies, collectively known as “Abenomics”, were designed to enhance exports and stimulate growth.
Abe’s critical error, like that of many politicians, was failing to recognize the ever-changing nature of the global economy. When one aspect is manipulated, consequences arise elsewhere.
This means that financial strategies often yield unintended consequences. They can lead to market distortions, misguided investments, and harmful economic bubbles that emerge in unexpected ways. Frequently, gains in one area are counterbalanced by losses in another.
One Crisis from Disaster
A weaker yen has indeed benefited Japanese exporters. As noted by AP, “The weakness of the yen since late 2012 has spurred exports, crucial for Japan’s economic structure, exemplified by Toyota Motor Corporation, the world’s leading automaker.”
However, a weak yen also escalates import costs.
Japan, which lacks natural resources, heavily depends on imports for oil and natural gas. Since the Fukushima nuclear disaster in March 2011, energy costs have soared due to the shutdown of all 48 of the nation’s operational reactors.
The escalating costs of energy imports were not accounted for by Abe as he embraced Abenomics. Moreover, Japan is perilously close to a financial crisis, with gross debt exceeding 240% of GDP.
Burdened by such massive debt, the prospect of economic growth seems grim. Increasing taxes to manage the debt would likely halt growth, which is why Abe opted for the politically convenient approach of inflating the currency — a decision that proved to be a miscalculation.
Abe believed that devaluing the currency would help diminish the debt while enhancing exports. However, he overlooked that a weaker currency could paradoxically lead to escalating energy expenditures.
What Is Really Backing the Dollar
Japan’s increased exports from selling Toyota cars abroad have been undermined by surging costs associated with oil and gas imports. Similarly, while Abe may have acted with good intentions, his decision-making was clouded by vanity. In currency management, such flaws are hardly unique.
Janet Yellen, Chair of the Federal Reserve, recently conducted her first Federal Open Market Committee meeting since succeeding Ben Bernanke. Like her predecessors, she is convinced that the economy requires more money. Yet Yellen faces the daunting task of addressing the fallout from Bernanke’s policies while curbing the pace of new money creation.
The latest FOMC statement revealed a plan to reduce money creation from $65 billion to $55 billion per month. Additionally, Yellen indicated that the federal funds rate would likely remain at near-zero levels for “a considerable time” after the conclusion of this program.
However, when pressed for clarity on what “considerable time” entailed, her response was somewhat evasive: “I — I, you know, this is the kind of term it’s hard to define, but it probably means something on the order of around six months or so. But, you know, that depends on the conditions,” Yellen stammered. This reflection offered some insight that many had yearned for from a Fed Chair.
Historically, the notion that the dollar is backed by the full faith and credit of the U.S. government has always seemed insufficient. However, Yellen’s slip inadvertently clarifies what truly underpins the dollar.
Ultimately, it rests on little more than empty assurances.
Sincerely,
MN Gordon
for Economic Prism
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