Crisis Averted? Hardly.

At the beginning of April, the Japanese Minister of Finance, Mr. Kaoru Yosano announced plans for a US$100 billion stimulus package to correct the failing domestic economy. Having adjusted their official projections to a three percent contraction for the fiscal year, the Japanese Finance Ministry is gearing up for what appears to be closer to five percent. With Japan’s worst recession since the Second World War beginning to eat away at growth, Aso’s LDP has shed its reluctance and committed four percent of the nation’s income to this stimulus package. Surprisingly enough, this figure is greater than that of either the United States of the United Kingdom.

The plan comes as a response to the numerous problems ailing the domestic economy. Japan was only recently released from the effects of the ‘lost decade’ of the 1990s during which deflation stifled growth to an alarming degree. The export economy is now floundering with horrific exchange rates as the yen continues on a trend of valuation against the dollar. With the yen accruing value on the international money market, Japanese goods become comparatively more expensive. To a nation of export-heavy industrial behemoths such as Japan, the yen’s lingering strength is nearly a death sentence. To put the issue in perspective, the beginning of 2008 saw the yen valued at approximately 120 per dollar. The figure a year later was closer to 85 yen to the dollar and it was projected to fall further. This damaged exports as well as the yen carry trade, a high-volume trade of the yen traditionally used to cheaply fund subprime lending or enterprises in developing countries like the BRICs, for example. Clearly, the Japanese problem is felt the world over, reaching from the most developed nations to the least developed resource economies.

However, as a result of the announcement, the yen hit its lowest level against the dollar in almost six months and the Asian markets performed at their highest over the same period. It would seem, therefore, that the crisis has gone into remission and that Japan’s export economy will begin to reemerge. The yen’s current value of 98 to the dollar is encouraging to Japan’s producers. So is this the light at the end of the proverbial tunnel? Will this stimulus package be enough to save an economy starved for growth for twenty years?

Maybe. Economics is such a tough game to predict that it’s impossible to say for sure just how quickly change will take hold or even if the current measures are part of a greater trend toward correction. Personally, I remain skeptical. The Bank of Japan has finally cut its key interest rate to just 0.1 percent, an impossibly low figure and even now it is being forced to buy up commercial paper to help firms drum up the funds to continue. The man who has pledged to make Japan the first country to emerge from this downturn, Mr. Taro Aso, could find himself out of a job before too long as his approval rating goes from depressing to dismal. And before the year is out, the DPJ could become the ruling party, leaving the long-term effects of a last-ditch LDP package up in the air. The government is spending a great deal of money it doesn’t have to finance this, but Japanese citizens can take solace in the idea that the national debt is already so high that a four percent increase is almost negligible.

Please feel free to contact me about this topic! Things may sound bleak, but I have upbeat things to say as well.

Colin