Published in the Financial Times 15/12/2014
If you’re thinking of coming to Japan for a spring break, you’d better book fast. Occupancy rates for Tokyo and Osaka hotels are at twenty two year highs as big-spender Asian tourists flood into the country. The impact is felt not just at the high end. Asakusa, a downtown area fast becomingTokyo’s new hipster central, is now a destination for foreign backpackers.
Japanese Prime Minister Shinzo Abe is sometimes criticized for exacerbating tensions with China. In reality Abenomics, his reflationary policy package, is responsible for supercharged growth in the most personal form of interaction between the two countries. In the last year alone, visitor arrivals from mainland China soared by 80%.
A dozen years ago, total visitor arrivals to Japan were running at around four million a year. This year they will top thirteen million and the government’s target of twenty million by 2020 looks easily attainable. The key driver is the Japanese currency which has depreciated from 78 to 120 against the dollar in just two years. In real trade weighted terms the yen is at its cheapest since the advent of floating currencies in the early 1970s.
Tourists can change their holiday plans at the drop of a hat. Complex global businesses take years to reconfigure their supply chains and investment strategies. Yet that is exactly what is going to happen once managements are convinced that the new super-competitive yen is here to stay – and Prime Minister Abe’s solid election victory will help to provide such reassurance.
In recent years corporate Japan has held down investment in new facilities while boosting margins. As a result the profitability of the Japanese capital stock is at the highest level in four decades. Meanwhile, companies have generated cumulative free cashflow equivalent to 80% of GDP – the other side of the ledger to the much discussed stock of government debt. With stalwarts in old economy sectors as steel and shipbuilding now claiming to be the low cost producers in the region, conditions are ripe for a multi-year capital investment boom driven by re-shoring of production and, ultimately, labour shortages.
For a country not in crisis to experience a currency decline of such a scale is rare. In today’s “lowflationary” world it constitutes a pure gain in competitiveness. What we are witnessing is the mirror-image of the 1990s Asian Crisis, when countries with heavy dollar-denominated external debts were driven to the brink of bankruptcy by currency declines. Japan, in contrast, is experiencing a substantial strengthening of its solvency – thanks to the stock of net overseas financial assets, equivalent to some 60% of GDP, which make it the world’s largest creditor.
Add the change in the yen value of this treasure chest to a rise in the capitalization of the Tokyo stock market and the increase in the value of urban real estate and you have a massive stealth de-leveraging – not by reducing debt, but by boosting national “equity.” If Japanese asset prices were at elevated levels this dynamic might be dangerous. But real estate and stock prices are barely higher today than twenty eight years ago.
Is there a risk that Japan might ignite a full-on currency war? The Japanese authorities maintain they are not actively seeking a weaker currency, but the epoch-making shift from hard money to soft money taking place under Mr. Abe must affect the yen’s external value if it is, ultimately, to affect its internal value. The Bank of Japan was right to ignore complaints about higher import costs from some businessmen and politicians. It is impossible to shoot for an inflation target while simultaneously trying to rein in the currency
More to the point, it is by no means clear that currency weakness inevitably bolsters exports and cuts imports. The one precedent for a large depreciation in normal conditions is the halving of the dollar versus the yen and the D-mark after the Plaza Accord between the G7 countries in 1985. The US external deficit remained intact, driven by the balance of savings and spending within the economy. Likewise, it is plausible that a successful Japanese reflation would have the greater impact on domestic demand, not the trade balance.
In the meantime everyone from gap-year students to executive travellers can enjoy the delights that Japan has to offer at bargain basement prices- provided, of course, they can get a reservation.