Japanese pain points to US dollar overvaluation

Posted on 19 October 2009 with no comments from readers

by UAE billionaire businessman Khalaf Al Habtoor about the plight of Japan and its falling exports due to an overvalued yen.

Japan is often forgotten amid the enthusiasm for China but remains the second largest economy in the world. Indeed, it will be at least another two years before China overtakes Japan say economists.

Mr Habtoor reminds us that the pain of the global recession has been felt more keenly in Japan than the USA with total August exports from Japan down a whopping 36 per cent. He is a big import agent for many brands so speaks with considerable authority.

Yen overvalued versus US dollar

His contention is that there is no problem with the superiority of Japanese products. It is the exchange rate that is the issue. It is significantly overvalued, making Japan uncompetitive.

Is this really true? Samsung is far ahead of Japanese electronic firms in flat screen TVs, nobody else makes the new LED screen. Apple makes the best mobile phones and personal computers. For cars Mercedes and BMW arguably still have the edge.

However, the overvaluation of the yen is much easier to establish. Japanese tourists might be flush with spending money abroad but exporters are wrestling with a monster that threatens to kill them.

Mr. Al Habtoor explains this overvaluation in reference to the global financial crisis and a retreat into the yen as a safe haven, a little ironic given the severe damage it is now doing to this supposedly safe haven economy. He calls on the new Japanese government to do something before it is too late.

Actually it is probably already too late. China with its dollar-pegged currency sits next to Japan with its low-cost manufacturing plants and less and less need for Japanese marketing and financial skills.

So Chinese goods get more competitive with the weaker dollar while the higher yen cripples Japan. And yet it has always been perverse that Asia could support such high wage costs in Japan alongside very, very much cheaper labor in China, and that is clearly now changing.

Dollar crisis?

However, you have to wonder about whether the US dollar really is going to get weaker as many analysts suggest as a result of government bailouts and stimulus packages. Against which currency is the dollar going to weaken?

The dollar is already worth half of its peak rate against the euro, and is surely banging right up the top of the rate the Japanese yen can handle, if not past it. You can point to smaller currencies like the Norwegian kronor and the Australian and Canadian dollars.

But at the macro-economic level the US dollar might actually be reaching the limits of its decline. The pound sterling has recently been weakening against the dollar. Might the yen be next? Mr. Al Habtoor raises an interesting point.

Certainly if the dollar tries to devalue any further it is going to run up against some powerful resistance from central banks around the world.