Lessons from Japan


I was looking at a chart showing the performance of the Japanese yen two days ago. Curiously the yen seemed to mimic the performance of main equity index in Japan – Nikkei 225. Here is the chart below

Figure 1: JPYUSD vs. Nikkei 225

Source: Bloomberg

The yen has shot up roughly 35% since the end of October 2012. In more plain English, the JPYUSD depreciated 35%. Outrageous right! That’s how a Nigerian would think as we seem to equate currency weakness with bad economic policies. The figure alone would be bandied about by a motley crew of doctors, lawyers, journalists etc as evidence that whoever directed our economic policies was either an idiot or a stooge of the IMF/World Bank.

Amazingly the Japanese currency weakness was a deliberate effort triggered by the second Prime Ministerial coming of the maverick Japanese politician Shinzo Abe in late 2012. As with every self-professed messiah, his gospel was Abenomics – and his monetary policy disciple would be Japan’s new central bank governor Haruhiko Kuroda. Six months later, the Bank of Japan (BoJ) would announce a monetary policy called QQE (Qualitative and Quantitative Easing). The goal of the policy would be to attempt to defeat decades of deflation in Japan – basically a target to raise inflation to 2% by 2015 (Inflation averaged roughly 12% over the last ten years in Nigeria). The QQE would see the BoJ print roughly 7trillion yen monthly (1JPY = N1.51) which would basically double money supply over the period. Now wait, they are intentionally devaluing their currency and printing money like crazy – Kamikaze type inflation causing economic madness. Some commentators called it shock-and awe.

But amazingly not everyone saw it funny then. No sooner did the Japanese yen begin its dance from 79 to 108 yen to $1 did a few countries start to whine that Japan had just declared a new currency war by trying to artificially devalue its currency. This sounds familiar right? China’s currency is intentionally depressed – a point noted by Mitt Romney during the 2012 US presidential elections. He promised to label China a currency manipulator if elected. Now this is getting serious why do countries bother if another country foolishly decides to weaken or rubbish their currency?

Now to drive home the point, but first back to figure 1 – why is the Japanese equity market rallying based on a weakening currency? Japan is a manufacturing powerhouse exporting everything from the shiny Toyota’s we like to drive (no beef to Nissan, Mitsubishi or Subaru owners), TV’s and a host of electronic gadgets. To compete globally, i.e to ‘cheapen’ the price of exports, a weaker currency implies people in importing countries pay less for the same product. So basically the Japanese are trying to reduce the price you pay for importing their exports by reducing the value of exchange rate. Basically they’re handing you a 35% price cut as against imports from competing countries. For instance Toyota (Japan) should become cheaper than a Ford, Volkwagen or even a Kia. No pun intended but wait what’s the value of the Korean won last I checked its 1071 to $1. Crazy again right?

Why are these countries not bothered if their currencies are selling for cheap to the USD whereas in Nigeria we get angry as the naira tracks higher to N164/$1 (CBN upper range is N163/$1). At this point you probably remember a parents rant about the gold old days of N1/$1.

I won’t attempt to explain why in this piece. Rather it depends on the viewpoint: who stands to benefit from stronger (weaker) currencies? Answer: consumers (producers). A country largely importing its goods would want its currency to be stronger whilst a producer nation would abhor a strong currency. This explains the Nikkei’s strong performance – 75% up since October 2012 as profits of Japanese companies essentially rocketed afterwards.

Glad to be back and have a nice day or as my Japanese friends would say.

良い一日を (Yoi ichinichi o) J



  1. Adegun Adedamola · · Reply

    I like this. Illuminating. Simple.

  2. Ibezim Okehie · · Reply

    Hello Sir…..you’re BAAAACCCCCK!

    I gave up on you, I’m pleasantly surprised to see your new posts.

    Yes, Nigeria needs to seriously DEVALUE the naira. I’ve often suggested to fellow Nigerians that Nigeria needs to adopt the dollar or a basket of hard currencies as official tender which means effectively devaluing the naira to ZERO, but I’ve been told its not wise in terms of monetary policy.

    So devalue it or simply remove all constraints on trading the naira and let the market find a true price for the currency.

  3. […] the desire is to development of a viable manufacturing industry.  As I’ve argued in a previous post, non-natural resource producer-exporter countries desire a weak currency whilst their […]

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