International | May 19 2006
By Chris Shaw (Tokyo)
The strong gains in the yen against the US dollar in recent weeks have prompted some fears for the outlook for both corporate earnings and economic growth in the Japanese economy, particularly as most corporations have factored in an exchange rate of around 110 against the US dollar in setting their earnings expectations.
But as Daiwa Institute Of Research (DIR) points out, the Japanese economy is now less dependent on the external environment than was previously the case when exports were the primary drivers of the economy.
Daiwa agrees corporate earnings could be under pressure from the stronger currency and ongoing strength in oil prices, but with the global economy remaining strong and signs emerging of a reacceleration in the Chinese economy the overall impact should be limited.
Just as important in its view are signs the asset deflation cycle is now closer to over than it has been for many years, particularly as land prices have started to tick higher in some areas. How important this is can be seen in the fact property prices in recent years have on average fallen to levels in line with those seen in the mid 1970s. This declining wealth effect is the opposite of what has occurred in recent years in the US, the UK and Australia, with obvious implications for consumer spending, which in Japan has struggled to increase in recent years.
In the last few months though most wards in Tokyo have experienced slight increases in land prices, while other large cities such as Osaka and Nagoya, the country’s second and third largest cities, are also showing signs of higher prices.
While not expecting this effect to quickly flow through to the country as a whole given factors such as the ageing and declining population and cuts in public works spending, DIR does suggest the trend will spread to further, which would provide further evidence deflation has been beaten and the current recovery is sustainable.
