Shaping a Portfolio for 2017: Japan

The central economic thought of the Abe administration has been to orchestrate a massive depreciation of the yen through interest rate declines and large-scale deficit spending.

The idea was/is that this would create enough inflation to break the deflationary spiral that has plagued Japan for the past quarter-century.  The threat that a yen tomorrow would be worth less in real terms than a yen today would, arguably, cause consumers to shift from saving to spending.  Yen depreciation would also give a boost to Japan’s flagging 1980s-style export-oriented manufacturing businesses, whose interests Mr. Abe represents.  Those firms would then increase hiring and boost wages, which would reinforce an upward spiral of nominal GDP growth.

The depreciation part of this plan has worked shockingly well, with the yen losing almost 40% of its value vs.the US$ of the past few years.  Tons of tourists have poured in.  But Japanese consumers, faced with enormous increases in the price of imported things like food and fuel–that is, facing a sharp fall in their standard of living–have not opened their wallets.  And, headed by the same managements that drove once world-beating  Japanese industry into the ground over the past 30 years, companies have saved the largesse of yen depreciation rather than modernizing business practices, raising wages and increasing hiring.

Mr. Abe has been calling for industry to change its ways.  At the same time, however, the laws the Diet put on the books during the early 1990s to effectively prevent involuntary change of company control from ever happening remain in effect, making his words ring hollow.

Worryingly for Abenomics, the yen has been strengthening against the dollar for most of 2016, gaining about 17% from February through September.

What could cause this?  Economic theory says that in cases like Japan the currency eventually begins to revert to its former level, leaving the country with no lasting effects other than higher inflation–and more government debt.

Currency markets seemed to have been saying that Japan had run out of time to make structural reforms and that Abenomics had failed.  For what it’s worth, that’s what I think is going on.

The dollar rally that has accompanied the Trump election victory has reversed almost all of that move, giving Japan at least a temporary respite.  My guess is that we should emphasize “temporary.”


As an investor, however, it seems to me that it doesn’t matter much whether my view of the Japanese economy is on the mark or not.  Even if the currency remains weak, I just don’t see a positive reason for investing there, other than in special situation companies.





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