The new Prime Minister of Japan, Shinzo Abe, has stoked a lot of excitement in financial and economic circles, that with this fiscal and monetary easing, he might be able to get Japan out of its slump.
The Nikkei has been surging in recent months, and inflation expectations are on the rise.
But while Animal Spirits are in the air once again, investors harbor a concern that it may all be impossible.
In a note to clients, Citi FX analyst Steven Englander reports on a recent client trip to Hong Kong, and explains what people are saying there about the yen, the impact on the region, and the prospects for Japan. Note the second view here, especially.
Clients are divided. There is a clear sense that the move is helping Japanese corporations that go head to head with Asian competitors, particularly in Taiwan, Korea and Singapore. Roughly speaking the expectation seems to be that another 10 percent move in USDJPY will generate about 3 or 4 percent weakening in Asian competitors.
However, there is a second view, which is that Japan is structurally impaired and its loss of competitiveness is as much due to the lack of dynamism and innovation in the Japanese economy. The view is that Japanese products have lost their lustre, and that consumers won’t necessarily flock back to Japanese products because they are not viewed as innovative or edgy. Some clients made the distinction between products such as autos, in which price was viewed as a major factor, and electronics, where branding mattered more.
This argument was also made by Henny Sender in the FT, that no amount of yen depreciation was going to make people switch from a Samsung phone to a Sony phone.
On the surface, there's definitely something too this, and Sony is of course the poster child for a formerly innovative company that's just collapsed from the global consumer stage. However as also noted, Toyota doesn't seem to have a dynamism problem, and there are numerous other firms that you don't hear about as much at all, and which are selling high-tech industrial equipment to growing markets.
That being said, after years and years of weak growth, it's plausible that structural impairment would grow, and dynamism would decline. So the theory is intriguing and worth thinking about more.
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