Japan is facing significant economic challenges. Recently, Japan’s Finance Ministry announced a 6.4 percent rise in exports, totaling $51.2 billion in January compared to the previous year. However, this positive news was overshadowed by a more alarming increase in imports, which surged by 7.3 percent to $68.6 billion.
As a result, Japan found itself with a staggering trade deficit of $17.4 billion, which was covered through various forms of debt: corporate, government, and personal.
Compounding this issue is Japan’s already dire government debt situation, which stands at 230 percent of GDP—the highest among industrial nations. Moreover, the economy experienced a contraction of 0.4 percent in the fourth quarter of 2012, marking three consecutive quarters of decline. If this paints a grim picture, it’s only just the beginning of Japan’s economic troubles.
For 2012, Japan’s trade deficit widened to $78 billion, but projections suggest that if current trends continue, the deficit could balloon to $208 billion in 2013. This is a pressing concern for Prime Minister Shinzo Abe, who is valiantly trying to remedy the situation.
However, Abe’s measures appear to be counterproductive, worsening the trade deficit rather than alleviating it. Let’s delve deeper into the complexities at play…
Infinite Complexities
From our perspective across the Pacific, it seems that Abe views the economy as a simple machine, believing that by adjusting a few monetary controls, he can set it back on a successful path. He identified a strong yen as the primary culprit behind the trade deficit and concluded that depreciating the yen would enhance the competitiveness of Japanese products in international markets, leading to an increase in exports and a reversal of the trade balance.
If successful, this scheme would provide Japan with surplus funds to address its debt. It sounds straightforward and reasonable. Yet, economies are notoriously complex. They cannot be treated like mechanical systems without considering a vast array of social dynamics.
Economic participants are unpredictable; preferences vary wildly. One individual might splurge on chocolates, while another opts for carrot sticks. There are even those who favor gum balls—specifically, red ones.
Rationality is also a rare trait; circumstances can drive people to pay exorbitant amounts for trivial items, demonstrating a whimsy that defies standard economic logic. Given this inherent unpredictability, how can Abe expect to engineer improvements with planned policies?
The Best Laid Schemes of Mice and Men
Robert Burns poignantly illustrated this dilemma in 1785, stating, “The best laid schemes of mice and men / Go often awry, And leave us nothing but grief and pain, For promised joy.” His words remind us that plans frequently fail to unfold as envisioned and can even lead to unforeseen hardship.
In the case of Japan, the citizens are already experiencing the negative repercussions of Abe’s strategy to weaken the yen. Initially, Japanese exporters like Sony and Sharp benefited as their products became more affordable overseas. However, the situation quickly deteriorated.
Japan faces significant resource limitations. As the yen depreciated, the cost of importing crude oil and other essential commodities skyrocketed. Recent reports indicate that imports of crude oil surged by 8.8 percent, reaching 2.26 trillion yen ($24.1 billion), which accounted for over a third of Japan’s total import expenditures.
Thus, while Abe’s intention was to stimulate exports by weakening the yen, the strategy paradoxically escalated the cost of oil imports, further enlarging Japan’s trade deficit. It’s clear that this unforeseen outcome has left many scratching their heads, perhaps even prompting laughter from Omoikane, the Shinto God of wisdom.
Sincerely,
MN Gordon
for Economic Prism
Return from The Best Laid Schemes of Mice and Men to Economic Prism