Weaker Yen: No Cure for Japan's Ills
12 February 2014
Standard Life Investments, the global investment manager, believes the underwhelming response of Japanese exports to the plunge in the yen should serve as a warning sign to Japanese policymakers that more reforms are needed, both at government and corporate levels.
The latest edition of Global Perspective examines why the recent sizeable depreciation of the yen has not had more of an impact on Japanese exports. Detailed analysis shows a range of long term factors at work. The report highlights that widespread structural reforms, including changes to the tax system, labour market institutions, innovation policies, product market regulations and corporate governance, must be recognised as being just as essential for restoring Japan’s external competitiveness as they are for revitalising the domestic economy. If the so-called third-arrow agenda continues to disappoint, then the long-term decline in Japan’s export market share is unlikely to be reversed, regardless of the future path of the currency. This has implications for domestic growth and therefore portfolio investment in Japanese companies.
Jeremy Lawson, Chief Economist, Standard Life Investments, said:
"Japan's weak export performance under the Abe government suggests that the country's problems have been misdiagnosed.
"Structural reforms are the key to boosting exports in the longer term, as well as unlocking domestic growth potential and encouraging portfolio investment in Japanese companies. Currency devaluation can only ever be a stop-gap measure."
"The implications of Japan’s experience should not be lost on those nations considering currency devaluations as a short-cut to regaining international competitiveness. While facilitating depreciation can be an effective way of absorbing negative external shocks, in the long-run it does not boost living standards or prevent the erosion of export market share, particularly when the supply side of the economy is the real problem."