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Why I'm Bearish On The Yen

Published 10/29/2014, 02:22 PM
Updated 07/09/2023, 06:32 AM


I’ve had a few requests for my views on the yen, so here goes…

First off I’ll say my bias has shifted over the past month or so. Well, not shifted as such, but changed from relatively neutral to bearish. The reason? Japan’s response to the sales tax rate hike bank in April.

Some of you reading this will no doubt already be aware of Shinzo Abe (Japanese Prime Minister) and his “three arrows” policy. For those that are not, you can find out all about it here.

For those without the inclination to read through the long piece I linked you to, the policy is basically a three pronged attack designed to inject life into the stagnant Japanese economy. It combines fiscal and monetary policy with structural reform – and is the primary driver behind the weakness in the yen we’ve seen over the past couple of years.

Initially, it looked as though Abe’s efforts were paying off. Employment rose, consumer activity increased and Japanese stocks were reaping the benefit. Now however, things don’t look so rosy. Why not? Japan’s aging population – but not for the obvious reason. In Japan the number of elderly (65+) people rises by a little over 1 million each year. The demographic accounts for about 25% of the total economy. The total social security bill in Japan is something like 100 trillion yen. About 60% of this is paid by insurance policies – but the Japanese government foots the bill for the remaining 40% from its tax revenues each year. Aggressive economic stimulus such as Abe’s three arrows costs money, and with a huge (and rising) social security bill the Japanese government needed to find a way to raise its revenues. This led to the sales tax rate hike earlier in the year, from 5% to 8%. My bearish bias lies in the nation’s response to this bias.

Initially, it looked as though the economy could absorb it and maintain growth. Retail activity picked up a bit before the hike (as people rushed to buy things that would be 3% more expensive post-hike) and this skewed the short term data to make it look as though Japan would be OK. Now however, not so. Inflation is weak, household spending is down and industrial activity is waning.

In short – it looks like the sales tax hike has reversed any positive momentum initiated by Abenomics which, for me, is a sign that the seeming recovery was fragile at best and that Japan looks doomed to economic stagnation for the foreseeable future.

Further, we have another rate hike scheduled for this time next year.

Latest comments

I approached this article out of curiosity, not knowing much about Japan's economy so this was a quite an educational read. Its interesting that 25% of the economy lies with the 65+ demographic. That's quite a lot! This was a informational assessment. I believe I'll look more into this now.
It is disappointing that Japan's economy isn't heading in the right direction. With all the world's economies getting more and more global, their failures are sure to be felt over here. With our population also getting older, I for one am hoping the US government takes a look and doesn't follow the same path.
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