Teetering euro, U.S. drought may send yen toward 50-to-$1 level
A Tokyo housewife opens her parasol as she exits her home on a hot afternoon, and heads in the direction of her neighborhood supermarket. Her husband, who works for an electronics manufacturer, has seen his salary cut repeatedly over the past several years, and since his wages are down by around 30% from what they were before, she’s become increasingly budget conscious.
But on every aisle of the store, the food items on the shelves—cooking oil, butter, bread, confections, tofu, natto, soft drinks, beer—all reflect price increases of from 10% to 20%, caused by record-high prices of grains and other commodities as the U.S. heartland sizzles and shrivels under severe drought conditions. The higher costs of feed grains will also affect the cost of pork and beef.
The surging value of the Japanese yen was not enough to offset the cost increases, leading to progressively shrinking household budgets. Meanwhile, her bills will also be higher for electric power, perhaps by around 1,000 yen more per month. Back home, she asks her 30ish son—a university grad who has yet to find work—“Have you eaten lunch yet?” It’s past noon on a weekday and he’s just crawled out of bed.
Shukan Shincho (Aug 2) warns this is a foretaste of Japan in the year 201X—perhaps sometime very soon—where the yen trades at 50 to the U.S. dollar and the Nikkei-Dow average fluctuates around 5,000 yen.
“Under this situation, employment opportunities at Japan’s manufacturing firms would likely plummet,” predicts Toshihiro Nagahama, chief economist at the Dai-ichi Life Research Institute. “But because the working population as a whole won’t decline rapidly, it’s likely that overall wages will fall. People at the lower income rung, as well as those in the middle, and higher income levels as well, will all be affected. It’s going to hit everyone hard.”
Should the worst-case scenario occur, Nagahama predicts that middle-class wage earners may even find themselves below the poverty line, a situation American hedge fund manager Doug Kass calls “screwflation.” It’s a phenomenon that is already unmercifully starting to peck away at the prosperity of members of Japan’s middle class, no matter how hard they work.
To make matters worse, European economies are teetering. On July 23, Moody’s downgraded the credit ratings of Germany, the Netherlands and Luxembourg from “stable” to negative.”
The various implications of the possibility of looming financial crises not only for Greece but for Spain and possibly even Italy have already driven the Euro down to 94 yen. This may also impact negatively on the U.S. dollar, Nissei Insurance senior economist Tsuyoshi Inoue tells the magazine.
The instability of the dollar and Europe, a writer for a national daily newspaper predicts, will lead to “a continuing string of corporate bankruptcies.”
“Layoffs would become increasingly severe, and wages would decline further,” he speculates. “Hiring of new university graduates would come to a halt, leaving young people with nowhere to seek jobs but overseas. And there’d be no market for stocks of export-oriented companies. If French and German banks sell off their Japanese paper to settle bad debts, it could cause the stock market here to plummet.”
Economic analyst Takuro Morinaga agrees that the possibility of a 50 yen to the dollar exchange rate can’t be ruled out. The result, he says, would be “violent deflation” with Japanese manufacturers shifting production offshore, leading to unemployment levels unseen since the 1930s.
As a hedge against currency instability, some people in the financial sector are recommending shifting assets to the Chinese yuan in anticipation of its rise against the dollar and yen. An unnamed banker is quoted as saying he and his colleagues have already shifted one-third of their savings to Renminbi. While the magazine seems to think that clever investors can reduce the impact of a major crash, for most, suggestion that diversifying assets may stave off disaster is anything but reassuring.