The Strong Yen is Killing Japan’s Economy

Sometimes your age rears up and slaps you in the face…

I was recently reading the Wall Street Journrnal and noted that Japanese car companies – the mainstays of the country’s manufacturing and export machine – are cutting production in Japan. The continued strength of the yen is making it unprofitable to keep exporting from the homeland.

So what does this have to do with age?

Well, I know having a strong yen that kills manufacturing is a situation that cannot last. Economically-speaking, it will choke the life out of the country. So when I read about the yen, in my mind I instantly heard the old Hall & Oates song, “Baby Come Back.”

The lyrics continue, “You can blame it all on me, I was wrong, and I just can’t live without you.” Somehow the economic situation in Japan translated into a soured relationship in my mind.

I know, I know. It is a bit odd for a person to read about global manufacturing and foreign currency exchange rates and make a mental connection to a love song from the 80’s. What can I say?

But beyond that small social idiosyncrasy, the point is valid. A chasm is opening up in Japan because of the strong yen… and the country is falling into it.

While a strong yen is good for old people who live on their savings, it decimates the exports that support the entire nation. And the export exodus has begun. In some cases, it has turnrned against the tide…

Honda, Nissan and Toyota are all reducing their manufacturing in Japan. Honda will produce more in the U.S. and is exporting from its China facilities to Canada. Toyota is shuttering some capacity in Japan and moving production to France. Nissan is not only curtailing Japanese operations, it is starting to bring cars manufactured in Thailand into Japan!

So what do you tell the young people in Japan? “Hey, we won’t hire you. In fact, we are going to fire more people. But if you want a cool car made by the Thai, have we got a deal for you!”


Why Now?

You can’t really blame the car companies for making these decisions. After all, they are businesses, not charities. They are simply reacting to the economic realities they face.

Over the last 40 years, the Japanese exchange rate has fallen from more than 300 yen to the dollar to roughly 80 yen to the dollar. Just in the last five years the exchange rate has fallen from 115 yen per dollar down to 80. As the dollar buys fewer yen, Japanese companies receive less for selling products in the U.S., a situation not lost on the Japanese governrnment or the Bank of Japan.

The problem is that they don’t know what to do about it… Several times, the Bank of Japan has announced it will take measures to weaken the yen. Each time there is a small move lower in the yen but then it regains its strength.

The situation around the world – uncertainty in the euro, a slowdown in China, etc. – has investors and institutions seeking safe havens for their funds. With its strong manufacturing base and historical stability, they’ve turnrned to Japan as that safe haven. But this safety is threatened by the very strength it projects. As manufacturing leaves Japanese shores, the safety floats away with it.

For those who subscribe to Boom & Bust, you’ve heard this before. We’ve outlined the situation in Japan and pointed out how this state of affairs translates into opportunity. As the old economist Herbert Stein said, “If something cannot go on forever, it will stop.”

When the situation in Japan becomes so difficult as to demand a drop in the yen for the good of the country, we want to be there, ready to pick up the pieces… or should I say, the dollars?


P.S. Adam recently uncovered a great opportunity to profit from the situation in Japan. He told Boom & Bust subscribers about it at the beginning on this month. You still have a chance to grab 57% gains on this play as well.



Ahead of the Curve with Adam O’Dell

Digging Deep into the Weakening Yen

Currency exchange rates are always relative. To answer the question – “Is the yen stronger or weaker today?” – you first must ask, “compared to what?”