Strengthening Yen Depressed Japanese Growth

December 10, 2012

It’s easy to see why Japanese officials have been distressed about the overvalued yen.  The currency’s appreciation since the onset of the global financial crisis in August 2007 has correlated with relatively weak Japanese GDP growth including three distinct recessions. 

The weakest value of the yen in 2007, 124.14 per dollar, was touched on June 22nd, less than two months before the onset of the sub-prime mortgage crisis and wider meltdown of global financial markets.  Japan’s currency is presently 51% stronger than then.  Yen appreciation was not caused by superior economic fundamentals.  Rather, yen demand benefited from risk aversion and continues to do so. 

The table below compares Japanese and U.S. real GDP growth over the five years between the third quarters of 2007 and 2012, expressed at annualized rates of change.  Comparative performances of the major components of demand are shown as well.

  Japan United States
Real GDP -0.2% 0.5%
Consumption +0.8% +0.8%
Public Spending +1.6% +0.1%
Residential Investment -3.9% -8.3%
Non-Residential Investment -2.4% -1.0%
Exports -1.4% 3.1%
Imports 1.2% 0.4%


Japan’s comparative disadvantage was centered in net foreign demand.  Personal consumption posted the same average expansion in the two economies.  Government spending and residential investment performed better in Japan than the United States.  However, inflation-adjusted exports of goods and services contracted 1.4% per year in Japan, whereas U.S. exports advanced 3.1% per year.  Likewise, Japanese imports rose 1.2% a year, three times faster than U.S. imports. 

Japanese voters will be selecting a new lower house of parliament this Sunday.  In Japan, the lower house is the more powerful legislative branch, and the leader of its majority party becomes prime minister.  Polls suggest the winner will be the Liberal Democratic Party, led by Shinzo Abe, who’s campaigned outspokenly as favoring a weaker yen and a more accommodative monetary policy to make that happen.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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