For decades, the Japanese economy has stood as a warning sign of what can go wrong when government debt reaches extremely high levels. Yet even though Japan’s Nikkei 225 stands at less than a third of its record high from 1989, the Japanese stock market has made big strides forward in the past few months, climbing nearly 3,000 points — or 35% — just since mid-November. Is the land of the Rising Sun seeing a sustainable recovery, or is this just the latest in a series of false starts that Japanese investors have suffered through over two lost decades? Let’s take a closer look.
Japan and the currency wars
Around the world, foreign currencies have been a major topic of economic discussion. With the capacity to affect import and export markets greatly, the tug-of-war of countries trying to spur competitive advantages in the global economy has involved most of the major economies in the world.
But until recently, Japan had bowed out of such manipulations, largely to its detriment. From 2007 to 2012, the yen had risen from 125 to the U.S. dollar to less than 80, even as the euro oscillated up and down and the British pound actually lost ground against the dollar.
The resulting impact on Japanese exporters was immense. Although automakers Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) have insulated themselves somewhat from currency fluctuations by opening factories in the U.S. and elsewhere, locking in costs in local-currency terms, Sony Corporation (ADR) (NYSE:SNE) and other major exporters undoubtedly felt the impact of the higher yen. But recently, the Japanese currency has reversed that trend, as the dollar rose from 78 yen in September to almost 94 yen now.
The Japanese government has encouraged the move, as it has increasingly used more aggressive rhetoric along with policy moves to weaken its currency. In January, criticism that the country’s easy monetary policy was deliberately intended to spur further declines in the yen sparked concerns that it could trigger a new round of competitive devaluations, resulting in a currency war that could destabilize the entire world economy. Yet even though Japan has backed off its rhetoric, the yen has remained weak, and some think the currency could fall to a single U.S. penny in the near future.