Is Japan headed towards recession?

As Fti told earlier, I don't think Japan has fully recovered from the '90 bubbles. If they are heading towards a recession, since they have such a low interest rate, monetary policies won't help them too much to get out of a recession.

I also saw in this thread, some traders saying Japan will go in recession because of a strong yen affecting its trade balance.
Honestly, a strong yen will need some time to destroy an economy (this shocks aren't transmitted from month to month).

One step further, from my point of view, the relationship between the currency and the trade balance is somehow lost. Academic paper have shown that a strong dollar has a 7% (!!!) influence over the trade balance, while the Housing Market has a 30% influence over the trade balance

Just my point of view

Agreed.


I don't think anyone in this thread is saying the effects of the strong yen will be immediate, but there seems to be no end in sight for the yen's strength, so its effect will eventually catch up. The only question seems to be how severe those effects will be.


The reason, as we have already discussed to some extent in this thread, comes from the fact that imports of raw materials are cheaper when you have a strong currency. For a country such as Japan, which imports nearly ALL of its raw materials, a strong yen will have a favourable effect. To what extent these gains will offset the losses in export competitiveness remains to be seen. If you have any specific academic papers that deal with this, I would love to see them.

Thanks for your input.

I can remember it was published by the ECB, but I searched it and couldn't find it. I'll try again, later

Thanks for your insight :

Wall Street is changing its stance and becoming much more bullish on Japan:

http://www.bloomberg.com/apps/news?p...7qs&refer=home

It would seem that the Japanese have the "decoupling of emerging markets from the US" to thank for this good fortune.

My own thoughts on decoupling have changed somewhat in recent months. When I first stumbled across the theory, I thought decoupling was a load of crap. Then I began to change my mind somewhat. Looking at the surface right now, it would seem that the developing world has successfully decoupled from the US, while Japan and Europe are still somewhat susceptible to a weakening US, but buoyed by the fact that emerging economies are still creating demand for high end Japanese and European goods and services. This is only the surface however, and the truth is rarely pure and never simple.

These ideas lead me to think that, if there is continued demand for high quality Japanese and European products, despite the strong Euro and Yen levels, then it would stand to reason that demand for American products would be even higher, since American quality standards are (arguably) equally high as those in Europe and Japan, and American products now have a price advantage due to the weak dollar. American corporate earnings for 2008 Q1 have shown this thinking to be correct.

So where does that leave decoupling theory?

In my view, the world has not decoupled from the US so much as there has been a global redistribution of risk. While emerging economies are no longer completely dependent on the US consumer (risky), the American economy is also no longer completely dependent on the US consumer. Instead of a one way dependence, now risk is more equally distributed. It is somewhat analogous to credit default swaps as a redistribution of risk, decreasing the chances of an overall systemic failure - or so it seemed until the current financial crisis in the US. The downside, of course, is that this increased interdependence, also known as globalization, maximizes the global effects of any such systemic risks, while minimizing, though not eliminating, the chance of its occurrence.

So is decoupling a myth?

Yes and no. Yes it is a myth, because in an increasingly globalised economy, the mutual interdependence of individual nations' economies can only increase, so any one economy's ability to decouple from others becomes weak. And no it isn't a myth because downside risk can now easily be distributed beyond political borders, onto the shoulders of consumers in the "decoupled" nations.

What this model will fail to anticipate of course, are global asset bubbles. The ability to redistribute risk does not, at the end of the day, mitigate that risk, although it may seem to for a time, allowing for investor exuberance to entrench itself in market sentiment. The jury is still out on whether such exuberance is rational or irrational.

Once global economic imbalances correct themselves (theoretically) through the efficient and uninhibited functioning of global financial markets, what the world will be left with is one giant asset bubble (borne of exuberance), out-of-control inflation due to developing nations' wage inflation as well as skyrocketing commodity prices, and no carpet left under which to sweep the problems.

In the meantime, back on the topic at hand, my views on decoupling support the view that Japan will in fact skirt recession, which may turn out to set the stage for the next JPY rally. It would be strange indeed to trade the yen based on Japanese economic fundamentals instead of risk sentiment, but it might just come to that.

Excellent thread. keep it up guys

Japanese automakers facing tough times due to US slowdown and strong yen: Bloomberg Article

Calculations based on USD/JPY 100.00 and EUR/JPY 155.00.

For every 1 yen gain on USD/JPY, Toyota operating profit drops by 40 billion yen (!) according to the company.