On June 2, Japan's
prime minister abruptly resigned. And, yes, we should worry. However, nobody —
at least nobody in the financial markets — seemed to care. What's with
Former Prime Minister Yukio Hatoyama was dubbed "The Alien" for his
staring eyes and a proclivity for bewildering philosophical asides. He said the
sight of a little bird gave him the idea to resign. Only eight months ago he and
his Democratic Party of Japan (DPJ) swept the polls in a landslide victory,
ending nearly 50 years of rule by the Liberal Democratic Party. They promised to
remake the country's politics, revive its economy and loosen the grip of
bureaucrats. But by wavering and then backtracking on a promise to remove an
American military base on Okinawa, he made himself look indecisive, rapidly
squandering his popularity. Not helping matters, murky financial scandals
involving several members of the administration and the Prime Minister himself
caused a relatively quick turnaround in the opinion polls, which certainly must
have helped make the decision to resign that much easier.
Hatoyama was the fourth Japanese prime minister in four years to resign. So,
this was basically business as usual in Japan. A leader's resignation in just
about any other major industrialized nation (except in Italy, which is another
story for another time) would be an earth-shattering event for the public. Its
stock market would certainly fall with the expected political uncertainty. In
the case of Japan, we are talking about the second largest economy in the world.
Leaders of such powerful economies typically do not relinquish power so readily
and easily. Unfortunately, it would be quite easy to assume that whoever's in
charge in Japan will make no difference to the success of their economy. No
wonder China's prominence in the region was achieved so easily over the half
dozen years or so.
Granted, the financial markets did have a reaction,
albeit brief, following the PM's resignation. The Japanese yen weakened for a
moment once the markets learned that the leading candidate to replace Mr.
Hatoyama was Mr. Naoto Kan, the Finance Minister in Mr. Hatoyama's
administration. Mr. Kan is widely known to believe quite strongly that it will
take a weaker yen to help the country's export-led recovery and even more
aggressive easing of monetary policy by the Bank of Japan to revive Japan's
economy. And, although he said recently that he "has no instant fix," the
markets will be watching closely for signs as to how quickly and aggressively he
moves on his beliefs.
The good news is that Mr. Kan's ability to lead the
country will be greatly enhanced by the resignation of Mr. Ichiro Ozawa, the
DPJ's secretary-general. In the edition following the resignation, The
Economist magazine called Mr. Ozawa "a Svengali-like figure who stood
mischievously behind the scenes as king-maker in the short-lived Hatoyama
leadership." They add that this "Shadow Shogun" represented the worst side of
old politics in Japan. To Mr. Kan's credit, by helping convince Mr. Ozawa
to resign, he has given the world an important signal of real potential
As for the Japanese yen, it remains in a long-term trend of
strength against the U.S. dollar, but since Mr. Hatoyama's resignation it has
been trading in the 91-93 range. Pundits in the art of technical analysts
suggest that as long as the dollar-yen rate remains below 95, a resistance level
that has held several times in the six months, then the long-term down trend in
the dollar/uptrend in the yen remains intact. If it breaks above 95, then the
trend (at least in the medium term) reverses, and guarantees it will move back
up to 100 and beyond.
Interestingly, one wild card in the currency
markets is the role of the Japanese investor. According to Bloomberg, Japan is a
nation of savers and Japanese households have combined savings of 1.4
quadrillion yen ($15 trillion). Mrs. Watanabe, the proverbial money manager in
the Japanese home, does not hesitate to move savings into higher-yielding
investments in foreign markets. With local time deposits yielding just 0.11
percent, Brazilian bonds yielding 6 percent look very attractive. Collectively,
the impact of Mrs. Watanabes on the global currency markets is huge.
Historically, they have been sellers of yen (from their savings) and buyers of
high-yielding foreign currency assets (e.g., money market or fixed income assets
denominated in Australian and New Zealand dollars, South African rands, Turkish
lira, and Brazilian reals). Any change in this group's expectations of their
government's monetary and currency policies may have a significant impact on
their investment strategy, and ultimately on the value of the yen.
bottom line — Japanese politics and investor aside — is that Japan's economy
desperately needs a weaker yen. The likes of Sony, Honda, Toyota and other large
exporters will soon be seeking an audience with the new administration to make
their case that something must be done about the yen, sooner rather than later.
We will see if the new prime minister, Mr. Kan, will be around long enough to do
something about it.
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