• News
• 2024-06-01

Japan's Economy in Turmoil: GDP Plunge and Yen Devaluation

The recent Japanese economy can be described as a mixed bag.

On the positive side, the Japanese stock market has seen a dramatic surge, with some indices recovering to historical highs. On the negative side, Japan's nominal GDP for 2023 is only $4.21 trillion, falling behind Germany's total GDP, and Japan has dropped from being the world's third-largest economy to the fourth.

Is Japan's economy a mixed bag? Is the GDP retreating to the world's fourth place?

In addition, there are issues such as Japan's 30-year deflation, major strikes and employee wage increases in Japan, the Japanese economy emerging from inflation, and the Bank of Japan may also raise interest rates due to these issues, among others.

Japan, now the "fourth place" holder,

Although using nominal GDP to judge a country's comprehensive strength is not very accurate, for Japan, the transition from the world's third-largest economy to the fourth-largest is always a loss of face.

According to the GDP rankings, Japan's total GDP for 2023 is $4.21 trillion, which is less than Germany's $4.45 trillion. So, it is not unreasonable to say that Japan's economy is in decline. After all, in terms of total volume, Japan's GDP has fallen.

Japanese media reported that Japan's GDP has been surpassed by Germany.

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However, there is a problem here. GDP is calculated on a "nominal" basis, which is tied to the "exchange rate" between the yen and the US dollar. Coincidentally, 2023 is a year when the Federal Reserve has raised interest rates, and there has been no rate cut so far. The US dollar's trend is extremely strong, while the yen's exchange rate has fallen so much that the Bank of Japan almost doesn't recognize it.

Therefore, the main reason for Japan's GDP being overtaken in 2023 is the significant devaluation of the yen against the US dollar, leading to a nominal collapse of Japan's GDP.Interesting things have been happening. Recently, in an interview, Putin stated that, calculated by purchasing power parity, China surpassed the United States a long time ago to become the world's largest economy.

Putin recently stated that China is the world's largest economy. This is because the same cup might cost 5 yuan in China but 5 dollars in the United States. Therefore, when calculated by nominal GDP, Japan ranks fourth, while China ranks first in the world by average purchasing power, and the United States might become second.

This illustrates the intricacies of GDP statistics under different methodologies and standards. Some people ask, since Japan's GDP ranking as fourth is due to exchange rates, why doesn't the Bank of Japan intervene to strictly control the depreciation of the yen? Can't they let the yen appreciate from 150 yen to 1 dollar back to the previous 90 yen to 1 dollar?

Starting from 2021, the yen has depreciated by almost 50%.

For the Bank of Japan, firstly, it is impossible to do so, and secondly, they do not want the yen to appreciate at all. Why is the Bank of Japan indifferent? Why must the yen depreciate?

Firstly, the global foreign exchange market is manipulated by the dollar hegemony. Whether it's the yen, the renminbi, or the euro, they all have to watch the脸色 of the United States and the Federal Reserve.As long as the Federal Reserve chooses to raise interest rates, the US dollar will continue to appreciate, leading to the depreciation of other currencies. So, why have the exchange rates of the Chinese yuan and the Japanese yen been depreciating since the beginning of 2022? The main culprit is the interest rate hikes by the Federal Reserve.

For the People's Bank of China, we need to maintain the red line of 1 US dollar to 7.3 Chinese yuan, so we have intervened in the exchange rate market multiple times and firmly controlled the exchange rate within our target range. Therefore, we can say that we have won the "exchange rate defense war."

Why has the yen depreciated? The main culprit is still the Federal Reserve.

However, although the Bank of Japan has also intervened, the intensity is not significant. It is not only because Japan's foreign exchange reserves are not as exaggerated as China's, but also because for the Bank of Japan, the depreciation of the yen is actually better for the Japanese economy.

Why do we say this? Mainly because of the particularity of the Japanese economy.

In the past few years, the Japanese economy has been pursuing a "foreign development" route, which means that the surplus yen in the country goes abroad to purchase overseas assets, invest in Europe and America, and buy European and American bonds. So we see that Japan has long become the second-largest creditor of the United States, and now, with China's divestment, Japan has become the largest debtor of the United States.

Japan's holdings of US debt have exceeded China's and are now 1.13 trillion US dollars.

However, after Shinzo Abe took office, he implemented Abenomics, believing that Japan's overseas investments are detrimental to the country. Only by devaluing the yen can Japanese companies' profit margins be restored, thereby helping them expand production.

So, at that time, the Bank of Japan went wild with the printing press, lowering domestic interest rates to around 0%, and the Bank of Japan issued government bonds without limit, which is why the Japanese exchange rate quickly depreciated from 75 yen at the time to 125 yen. At that time, Japan's GDP also experienced a significant decline.

However, after the yen exchange rate depreciated, Japanese companies immediately found that Japanese products were better sold abroad because Japanese goods were popular in Southeast Asian countries at the time, but they couldn't be sold due to high prices.But now, after the depreciation of the Japanese yen, the selling price of Japanese goods can be set lower, which has led to the opening of markets for Japanese goods in Southeast Asia and China. This has resulted in a recovery of corporate profits and ensured that the unemployment rate in Japan becomes lower.

Japan's unemployment rate is currently as low as around 2.5%.

In 2010, Japan's unemployment rate was about 5.5%, higher than China's current rate. But now, Japan's unemployment rate is around 2.5%-3%, already lower than China's. This is the benefit brought by the depreciation of the yen.

Therefore, Japan's GDP is actually a face-saving project. It looks good but does not bring practical benefits. On the contrary, after the yen's interest rate cut, Japan's manufacturing industry can be revived, and Japanese goods can be sold to more markets, which is the real benefit for Japan.

So everyone should understand why the yen depreciated so severely last year, and the Bank of Japan only intervened symbolically? Because it knows that most of Japan's capital is invested overseas, holding US dollars, and the depreciation of the yen cannot harvest them.

For domestic Japanese companies, most companies still rely on import and export trade. Only when the yen depreciates can Japanese goods sell better.

Moreover, Japan cannot go against the trend. Even if the Bank of Japan wants to appreciate the yen, it also needs to look at the Federal Reserve's face. Although Japan is a younger brother of the United States, following the United States is actually very miserable. So Japan has always been the object of harvesting, such as the "Plaza Agreement" previously required by the United States for the yen to appreciate, which directly collapsed the Japanese economy.

Should we protect people's livelihoods or the economy? Where is the Japanese economy going?

In recent years, the Japanese economy has gradually emerged from the doldrums. On the one hand, the Japanese stock market is continuously rising, and Japan's unemployment rate is low. Yen assets are seriously undervalued, and even Buffett personally bought stocks of Japan's six major trading companies and kept increasing his holdings.On the other hand, life is not easy for the average Japanese citizen, as the depreciation of the yen, coupled with the Bank of Japan's decision not to follow the interest rate hikes of Western countries, has led to significant import-driven inflationary pressures on the yen.

Yes, we used to talk about deflation in Japan, but in reality, starting from last year, Japan's CPI index for 2023 has already reached as high as 3.1%, while China's during the same period was only 0.2%.

Japan's CPI stands at 2.6%, with the core CPI at 3.7%, already surpassing China's.

So, looking at the data, the situations of deflation and inflation in Japan and China should actually be reversed; times have changed.

The consequences of inflation have led to a significant decline in the living standards of the Japanese people, as electricity prices in Japan have surged by 20%, and gasoline prices have skyrocketed, increasing the cost of living and rapidly decreasing the people's real purchasing power. This has led to widespread protests and demonstrations among the Japanese populace.

Thus, since last year, Japanese companies have been forced to negotiate with their employees and have implemented substantial wage increases, with Uniqlo's pay raise even reaching as high as 40%. All of this is due to the troubles caused by inflation.

Bank of Japan Governor, Kazuo Ueda.

However, despite the hardships faced by the general public, will the Bank of Japan choose to follow with interest rate hikes? This is actually a very cautious decision, as the current Japanese government is very wary of falling back into the previous state of deflation. A slight inflation is not a big issue, as the Japanese people are patient and have a variety of coping strategies.

But, ultimately, whether it is to protect the yen's exchange rate, to maintain economic growth, to safeguard corporate profits, or to protect the living standards of the average Japanese people, these are the headaches the Bank of Japan must grapple with.