The Rising Sun and The Rising Yen

Mohammed is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At the end of Micheal Crichton's Best Selling Novel, 'Rising Sun', the author wrote

"Sooner or later, Americans must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. They have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufactured goods have the highest quality. They have the best food. The fact is that a country the size of Montana, with half our population, will soon have an economy equal to ours."

-- Michael Crichton

This novel was published in 1992 and its theme reflected the view that one day Japan will supplant America and become an economic superpower. Micheal Crichton was part of a political movement then in the United States, called Revisionists. Revisionists viewed the Japanese model of collusion between the government and Industry coined Japan Inc. as superior to the western model of relatively laissez free capitalism and called for the US to emulate it if it doesn't want to lose its place in the world.

20 years later and it's pretty clear that the Revisionist movement didn't think their theory thoroughly through. Rising Sun was published near the high of the Japanese Bubble and at the start of Japan's so called 'lost decade'. Japan still remains one of the wealthiest and most developed countries in the world, however, it has not supplanted the US, Japan itself has been supplanted by China.

Japan currently has debt levels at 220% of GDP, near zero GDP growth, and an equity market that is 75% below its highs from a quarter century ago. Recently there has been an interesting piece of information that has been circulating around the Internet; last year the number of adult diapers purchased in Japan exceeded baby diapers for the first time ever, talk about an aging population on steroids!

Remember when Sony (NYSE: SNE) revolutionized the music industry in the 1980s with the Walkman. Well Apple had the honor of doing the same this time around with its iPod.  Remember how Toyota (NYSE: TM), Honda (NYSE: HMC) and other Japanese car manufacturers were killing Detroit. Well, now General Motors is the most successful automotive company in China which is now the world largest automotive market and Ford is making strong inroads in India.

Just Recently both Panasonic (NASDAQOTH: PCRFY) and Sony were downgraded by Fitch to Junk Status, funny enough, Samsung's shares trading in South Korea jumped to their highest levels when the news broke out. Things haven't been so pretty for the once dominant Japanes corporations.

To demonstrate how far from Japan Inc. we have become I quote Foreign Policy writer Clyde Prestowitz

"In discussions with senior Japanese government officials over the past month, I noted that Japan seems to be losing out in the industries in which it has been especially noted for competitiveness and asked what plans there are to reverse the trends and what their vision of the future is. They replied that the vision is one of a 'Cool Japan' and that the plan is to focus on promoting activities in which Japan seems to have particular aptitude such as cooking, manga (cartoons), and anime (animation).  When I heard this from the institutions that fashioned what used to be known as Japan,Inc. I nearly fell off my chair."

There has been one Japanese item that has been growing for the past thirty years though, the currency. The Japanese Yen has appreciated by over 200% in the past 30 years, but don't mistake that for a good thing; an appreciating currency is never good for an export oriented economy.

With the Dollar currently being worth around 80 Yens, Japanese officials are more eager than ever to weaken the currency. Abe Shinzo, leader of the Liberal Democratic Party (LDP) and who may become Japan's next Prime Minister after the elections on December 16, has urged the Bank of Japan to unleash unlimited Quantitative Easing and flood the market with Yen.  He wants the BOJ to set a target inflation rate of 3% and overcome deflation.

It looks like the possible future Prime Minister wants to inflate Japanese economic troubles away.

I remember Howard Lutnick, CEO of Cantor Fitzergald, who was a guest on Bloomberg's Fiscal Summit saying something along the lines of the fact that the US can always turn on the printing press and pay off its debtors by inflating its way out of its debt. He said that the US can never be broke because it borrows in its own currency and you can only go broke if you borrow in someone else's currency such as Greece. 

So, it seems that Japan whose Debt to GDP is two times greater than the US is willing to turn on the printing press. The consequences  of that decision on the macro-economy and the bond market can be witnessed and studied for future lessons for the US and other countries. Keep your eyes on Japan for the next few years.


Pirlo0o has no positions in the stocks mentioned above. The Motley Fool is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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