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World Socialist Web Site www.wsws.org
WSWS : News & Analysis : Asia : Japan
Weakening US dollar threatens Japan�s recovery
By Joe Lopez
5 July 2002
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The weakening US dollar, buffeted by the recent financial scandals at Enron,
WorldCom and Xerox as well as a growing American trade deficit, threatens to derail
the recent export led improvement in the Japanese economy.
The dollar�s fall and the consequent strengthening of the yen is of major concern for
the Japanese government as it seeks to boost the crisis-ridden economy because it
pushes up the cost of Japanese exports, particularly to its largest market, the United
States.
Last week it resorted to bringing in the European Central Bank (ECB) and the US
Federal Reserve to sell yen in an attempt to weaken the Japanese currency. It was
the first time that the Japanese government had called on both the ECB and the Fed
to act on its behalf.
The latest attempt was the eighth occasion since May that Japanese authorities have
intervened in the currency markets in order to depreciate the yen with $20 billion
being spent to push up other currencies, primarily the US dollar. But the measures
have been largely unsuccessful as the US dollar continues to weaken.
In recent weeks, Japanese political leaders have been claiming that the economy is
on the road to recovery, following an increase in the growth rate for the first three
months of this year. But such claims do not cut much ice in international financial
circles.
A recent article in the Financial Times, for example, pointed out that the Japanese
recovery was highly dependent on the US economy and took a swipe at the Koizumi
administration�s lack of effort on �structural reform�.
According to Tokyo correspondent David Ibison: �While Japanese politicians have
been trumpeting their alleged successes in promoting structural reform at home and
claiming they have created an environment ripe for economic revival, the fact is that
Japan�s recovery is umbilically linked to the US economy. The combination of a US
economic recovery and a weak yen provided a panacea for Japan�s economic ills
and also promised to alleviate the political pressure on Junichiro Koizumi, the prime
minister, whose economic reforms have lost steam.�
Although they represent only 10 percent of Japan�s Gross Domestic Product (GDP),
the recent rise in exports, particularly to the US, accounted for half the economy�s
growth of 1.4 percent in the first quarter of this year.
Other figures pointed to a continuation of the recession. Capital spending on
factories and equipment fell 3.2 percent for the quarter, while consumer spending,
which accounts for 55-60 percent of Japanese GDP, decreased by 0.3 percent from
the September-December quarter of 2001 when it showed a 1.9 percent increase.
A total of 430,000 jobs were destroyed in April 2002, pushing the unemployment rate
to a near record of 5.4 percent.
This has led to cautious assessments by some government officials who describe
the latest figures as representing a �bottoming out� of the downturn of the past year
rather than signs of a sustained recovery.
If the dollar keeps falling, Japanese business will be hard hit. According to Shuji
Shirota, an economist at Dresdner, Kleinwort Wasserstein: �The industrial sector
would be able to handle a controlled decline in the dollar against the yen, but
exporters of raw materials, like iron and steel would suffer. If the dollar, now worth
about 119 yen, were to fall swiftly to below 110 yen that would virtually wipe out the
profits of most exporters.�
The government�s own Cabinet Office puts the break-even rate for most exporters at
115 yen to the dollar.
The continuing economic stagnation is having a major impact on government
finances as tax revenues decline. According to the Ministry of Finance, government
spending for this fiscal year will total some 81 trillion-yen; however taxes will
bring in
less than 47 trillion yen. This represents a shortfall of 34 trillion yen or just under
$250 billion.
The tax revenue decline is adding to concerns about the ability of the Japanese
government to continue to service the public debt, estimated to be around 140
percent of GDP and rising. Government spending aimed at trying to keep down the
value of the yen will add to the problem.
The rising public debt is one of the main reasons why international credit rating
agencies have downgraded Japan�s sovereign debt rating to the equivalent of the
African nation of Botswana. And if recent comments by Standard & Poor�s head of
Asian sovereign debt ratings, Tocharian Ogawa, are anything to go by, the credit
rating agencies may be looking at further downgrades.
Commenting on the state of the Japanese economy, Ogawa said: �The banking
system still doesn�t work, you have the corporate debt problems and capital spending
is falling. We don�t think this economic recovery is sustainable.�
Moody�s Investors Service this week cut five of Japan�s leading banks� financial
strength ratings to the lowest possible grade. SMBC, Mizuho Bank and Mizuho
Corporate Bank, UFJ Bank and UFJ Trust Bank were downgraded from E+ to E.
Moody�s description of financial institutions given the lowest E rating are banks
displaying very modest intrinsic financial strength, with a higher likelihood of
periodic
outside support or an eventual need for outside assistance. E-rated institutions,
Moody�s maintains, have financial fundamentals that are materially deficient in one or
more respects, or a highly unpredictable or unstable operating environment.
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