The Japanese economy has been stuck in a liquidity trap for almost a decade. Japan’s newly elected Prime Minister Shinzo Abe, who is now in his second stint in office, wants to take radical steps to retrieve the national economy.
Abe indicated that he would implement a set of economic policies, often referred to as “Abenomics”, to promote private investment and bolster the national economy.
Abenomics targets an annual 2% inflation rate, corrects excessive yen appreciation, sets negative interest rates, and expands public investment.
In March, Shinzo Abe nominated Haruhiko Kuroda as the new governor of the Bank of Japan. After his nomination, the yen fell to its lowest in around 30 months relative to US dollars.
Currency devaluation attracts criticism because it increases competition for other countries in international trade. But from Kuroda’s latest statement, we can see he will not back off. He will adopt “bold monetary easing policies”. We can expect that yen devaluation will go even further.
But if the yen depreciates in the long term, will it be a threat to the Australian economy?
If this trend continues, yen devaluation will hit Australian industries competing with Japanese producers. But in terms of GDP, these sectors are not a large part of the Australian economy.
In fact, the Australian economy would benefit from yen devaluation through trade with Japan. As the Japanese economy strengthens, it will generate more demand for Australian primary goods.
Trade data from 2011-2012 by the Department of Foreign Affairs and Trade indicates that Japan mainly imports food and minerals from Australia, which count for approximately 95% of bilateral imports, and Australia imports mainly elaborately transformed manufactures (ETM) products from Japan, which count for approximately 82% of imports.
Overall, Australia’s import of ETM counts for roughly 65% of total imports. ETM products include mineral, chemical or engineering products such as passenger motor cars and telecommunication equipment and parts.
There are a number of reasons why the devaluation of the yen is beneficial for Australia.
First, the food and beverage manufacturing industry is the largest manufacturing industry in Australia (see Trends in Australian Manufacturing). In this sector, Japan is not a major competitor to the domestic market. Yen devaluation could result in a situation where Australian consumers could buy Japanese products at a lower cost (in terms of Australian dollars) and Australian consumers could buy more local manufactured food products as they would have more to spend.
Secondly, competitors of Japan’s ETM exports are China, USA and Germany and yen devaluation could threaten these countries manufacturing for Australia. But even if the yen appreciates, the Chinese yuan, US dollar or Euro could possibly depreciate relative to Australian dollars. Then, these countries whose currencies depreciate to the Australian dollar would increase imports to Australia. We cannot judge whether yen devaluation is a threat to Australian manufacturing by only considering the yen to Australian dollar.
Thirdly, Australia can make use of the high dollar by investing in or buying out foreign companies. If an Australian company buys out other foreign manufacturing companies at a “relatively” cheap price it can take the opportunity to obtain new technologies for production.
Special attention needs to be paid to ETM industries. Australian manufacturers have to find a comparative advantage to remain competitive in Australia. Domestic consumers are shifting toward more ecological products. Coupling this demand from domestic consumers with the strong Australian dollar may allow manufacturers to invest in new eco-technology.
A healthy trading partner brings more demand to Australia. A better circulation of goods and money between Australia and Japan would bring a positive effect to the Australian economy as a whole.