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Yen's decline
Japanese economy is still faltering in a new way which is causing lot of concern that whether Japan will ever be able to come out of this crisis and regain its place as world’s second largest economy.

The tragic story is its currency Yen is losing its stem and it is deliberate as the government wants to keep Yen at a low height to boost sluggish economic recovery.    

If the items you purchase these days seem more expensive, you are not imagining things.

Electric bills are higher. The price for a litre of gasoline or diesel fuel has gone up, with costs being passed on throughout the distribution chain.

The raising of the consumption tax on April 1 boosted prices at the checkout counter. And certainly the past several months of inclement weather has caused the prices of certain vegetables and other food items to soar.

Such developments are poised to play havoc with the average household budget. According to data released by the Tokyo metropolitan government in mid-September, the price for a head of lettuce had already soared year on year by 86.5 percent (as opposed to 38.4 percent for cabbage).

Other increases (all figures in percent) included beef, 16.2; shrimp, 17.9; tuna, 11.2; salmon, 18.2; imported cheese, 12.2; chocolate, 13.8; and ginger root, 25.5.

If these were not enough, the decline in value of the Japanese Yen, which less than two years ago was soaring high at ¥85 to $1, cannot be ignored. Now that rate is approaching ¥110.

While certainly making some Japanese exports more competitive, the downside, reports Shukan Economist, is that it has pushed up the nation’s international balance of payments deficit to nearly ¥1 trillion per month.

The Yen’s decline is also causing a chain reaction. Higher interest rates are pushing more investors to shed their Yen holdings in favor of the dollar and other currencies.

While most economists’ predictions see the Yen staying in the ¥106-¥110 range for the immediate future, a few people have begun talking about the Yen being as low as ¥120 by sometime next year. And consumers can expect to feel the pain.

Shizuoka University economics professor emeritus Eiji Doi said the impact from the Yen’s decline has been more severe than the increased consumption tax. Combine the two, and that will make for a considerable burden on consumers.

It is a burden likely to fall particularly hard on people with lower incomes. In households with annual earnings of ¥3 million, for example, it will mean an additional ¥130,000 in outlays, which translates into a 4.3 percent drop in disposable income. For the nation’s elderly pensioners, that might pare away the equivalent of two months’ income.

Lacking a strategy

Nikkan Gendai accuses Bank of Japan Governor Haruhiko Kuroda of being on a “rampage” through his inflexible determination to pull the Japanese economy out of its deflationary spiral by achieving 2 percent inflation, come hell or high water.

“Using 2013 as an example, a 20 percent decline in the value of the Yen pushed up the core consumer price index (which excludes fresh food items) by one half of a percentage point,” Daisuke Uno, chief strategist at the Mitsui Sumitomo Bank, is quoted as saying.

“If we apply the government’s targeted CPI rise, 1.3 percent, to 2014, the average value for the Yen would have to come to ¥110. For the first half of this year, however, that rate was not achieved, so from October onward, we would need the average rate to reach ¥117.”

Aside from spending less on frivolities, what else can the average person do to reduce the squeeze on the household budget?

“To safeguard their livelihood, individuals will need to hold foreign currencies,” investment adviser Kazuhisa Okamoto told people.

Price increases, Okamoto suggests, can be offset by astute investments in foreign money markets. He recommends investors sink a portion of their nest egg into money market funds that include a basket of currencies: the dollar, the euro and perhaps the South African rand or Brazilian real, which offer high interest rates that are “unthinkable for the Yen.”

Some experts raise another potentially unhappy side effect of the weakening Yen: the prospect of Japanese being bought out of their own housing market by wealthy denizens of mainland China.

The deluxe condominiums selling for over ¥100 million-referred to asokushon, an incremental increase from the more plebian manshon-are in danger of getting snatched up, turning choice neighborhoods in central Tokyo into “Chinatowns.”

A seminar held in Shanghai in mid-September was attended by some 40 individuals looking for real-estate investment opportunities.

Thanks to “Anbei jingji-xue” (Chinese for “Abenomics”), China’s Yuan currency is expected to continue its appreciation against the Yen, making high-quality Tokyo real estate increasingly attractive for growing numbers of affluent Chinese with the means to buy it.

“Chinese are showing a trend toward favoring properties close to the imperial palace, or having a view of the palace,” Yujin Oki, president of Ginza-based realty firm Style Act.

Properties in so-called Three A’s (Aoyama, Akasaka and Azabu in Minato Ward) are said to be particularly popular, along with the central Tokyo wards of Chiyoda, Chuo, Shinjuku and Shibuya.

Gradually, the influx of these upscale Chinatowns brought on by the cheaper Yen may push Japanese out of their own city, resulting in workers having once again to endure long commutes from the distant suburbs.

Can such a scenario be even remotely possible? Or is this just the usual tabloid scare tactics, pandering to ethnocentric paranoia?

But exchange rates and commodity prices have a way of being dauntingly capricious, which calls for an extra measure of caution.

“The press pick up a theme and run with it, this being the effect of the relatively low Yen on the cost of living,” Stan Guy, who was formerly involved in the forex trade, said.

“For dramatic effect, they see only one side, the cheap Yen, and forecast the chaos it might cause. They do not mention, for example, the dramatic drop in crude oil prices, from over $100 a barrel a few weeks ago to around $80 now. Buying cheap crude has an enormous effect on prices, not only of gasoline but all things related to it.”

US fear factor

Due to loss of value for Yen, the Japanese have also started fearing the same way the Americans are worried over the widening gap between wealthy and middle class people.

Already, Federal Reserve chief Janet Yellen has warned that the gap between the rich and poor in the United States is widening and is near the highest levels in 100 years.

In a speech at a conference on inequality in Boston, Yellen did not mention monetary policy or the current turmoil in financial markets.

Instead, she focused on the widening wealth disparity and how that affects economic opportunity.

“By some estimates, income and wealth inequality are near their highest levels in the past hundred years,” Yellen said, noting the gap has grown steadily over recent decades, despite a brief pause during the 2008 global financial crisis.

During the Great Recession, the worst since the Great Depression of the 1930s, the richest Americans lost money, and increased government spending helped offset losses for the less wealthy.

“But widening inequality resumed in the recovery, as the stock market rebounded,” Yellen said, noting that “wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.”

However, that same inequality can limit access to economic resources for those lower on the ladder, “thereby perpetuating a trend of increasing inequality.”