Before we get stuck into this rollicking edition of Markets and Money, a hearty thank you if you responded to our advertisement on Insider Trading. We received some intriguing responses and observations. The project is under way. Please accept our apologies if you’ve written to us and we haven’t written back. We will soon. Stay tuned.
Now, to the world, and beyond, beginning with Japan. It turns out Toyota’s problems extend from manufacturing in Altona to Toyota City on the big Japanese island of Honshu. In fact, it’s not just Toyota’s problem. It’s a problem for the entire business model of Japan, Inc., and it doesn’t bode well for Australia.
Japan’s economy posted its first trade deficit since 1980. This is a country whose entire economic model has been based on exporting manufactured goods to the rest of the world. But for 2011, the Japanese ran a trade deficit of $2.6 billion.
These days, $2.6 billion is loose change in the sofa for central bankers. But the shift from trade surplus to deficit is still notable for Japan. Historic even. And yes, we know that the March earthquake affected Japanese output, as did the floods in Thailand later in the year, where a lot of Japanese manufacturers have offshored production.
But there are three real issues for the Japanese economy that also affect Australia. First is that the world has an excess of productive capacity. This makes it really hard for all but the lowest-cost/highest-value added producers to stay in business. Second is a strong currency. The yen isn’t exactly strong. But it’s relatively stronger than the US dollar and the euro. For Japan, a strong yen makes exports more expensive. This is the same problem the strong Aussie dollar creates for Australian exporters and manufacturers.
A third, but lesser-known problem is the composition of Japanese imports. As you know, Japan is a series of islands. It doesn’t have a lot of oil and energy to power its industry. It has to import that oil and energy. As energy costs rise (and the global dollar standard crumbles) import costs will rise for Japan.
Maybe 2011’s data is an anomaly for Japan. But if it isn’t, it tells you that the global currency wars are fundamentally reshaping the way the world’s economy works. It is clearly impossible for everyone to export their way to prosperity by keeping their currency cheap and selling to other countries. This “beggar thy neighbour” strategy can’t work on a global scale. Something will have to give.
What’s giving, at the moment, is the ability of manufacturers in some countries to stay in business. This is even worse news for Australian investors. Why? Australia is already a two-speed economy. The resource industry runs the show in Western Australia and Queensland. Banking and finance do the job for Melbourne and Sydney.
This division of national economic power doesn’t leave much room for things like making cars, airplanes, or anything that involves skilled labourers turning raw materials into manufactured goods. Yet…it doesn’t seem like a long-term national survival strategy to sell off your industrial and manufacturing base and concede that you now have to import all manufactured goods.
It’s a tough spot to be in. And there’s no easy answer. There never is when the fundamental power relationships that govern the world economy are in flux. And boy, are they ever in flux. This is the reason we’ve put a conference program together in March to discuss these issues. Look for more on that later today.
By the way, this could be the first step on a path of no return for Japan’s government. Japan’s trade surplus meant the government could run huge public sector deficits for years without having to pay large interest rates. The country had plenty of cash coming in the front door. And with high savings rates, the government was able to finance its Keynesian zombie projects without having to borrow abroad. Japan has a government debt of over 200% of GDP. But it owes all that money to itself, not foreign creditors.
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