Japans Economy and the Yen

Tokyo,

Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has recently become the worst.  Japans gross domestic product shrank 12.7 percent last quarter. The credit crisis that crippled the US financial system may have also knocked out the props that supported Japanese growth between 2002 and 2007, which was considered a US spending-bubble and a cheap yen.  The spread of this deterioration has taken many companies by surprise such as Toyota Motor Corp.  This month, Toyota forecasted a 450 billion yen ($4.9 billion) loss.  This is Toyota’s first loss in seven decades, which will cause Toyota to slash domestic production by half this quarter.

 

The International Monetary Fund last month forecasted Japan’s economy would shrink 2.6 percent in 2009.  In November, the fund predicted Japan would outpace its rivals.  Since then, industrial production plunged at the steepest pace in 55 years in the fourth quarter, and unemployment rose at the fastest rate in 41 years in December.

 

The second problem for Japans economy is the surge in the yen, which has climbed 17 percent in the past year. As the global financial crisis deepened, investors reduced so-called carry trades, where they borrowed in the currency to invest in nations where interest rates exceeded Japan’s, which haven’t exceeded 0.5 percent since 1995.  This financial crisis could make it unprofitable for many manufacturers to keep making cars and electronics.

Nissan Motor Co. plans to shift more production out of Japan in response to the strengthening currency and will also cut about 12,000 domestic jobs. Toshiba Corp, for example, may send some production to Southeast Asia to cut costs, according to the Asahi Newspaper.  A lot of the production that occurs in Japan is just no longer economically viable.

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