As Japan begins the difficult recovery process after Friday’s devastating earthquake and tsunami, the short term and long-term consequences of the wide-spread destruction on the nation’s economy are unclear. Immediately following the earthquake on Friday, the value of the Japanese yen rallied based on expectations that Japanese companies would bring cash home and buy yen to help repair the damage. After the 1995 Kobe earthquake, the yen rose and ultimately hit an all-time high. In early Asian trading on Monday, the value of the yen slumped after the Bank of Japan offered to inject a record 18 trillion yen (about $220 billion) into markets to secure confidence. The yen will face downward pressure if investors stop viewing the yen as a safe-haven currency or if investors begin to worry about the government spending on rebuilding. Japan already has the worst sovereign debt burden among industrialized countries at approximately 200% of the nation’s gross domestic product. With the exception of the construction industry, Japan faces weak economic growth which may also put downward pressure on the currency.

QUESTIONS FOR DISCUSSION:

1. Evaluate the tradeoffs to the Japanese economy of allowing negative investor sentiment to push the value of the yen lower. Given that a lower yen could help Japanese exports, should the central bank intervene if the currency trends downward?
2. The nation of Japan already has a heavy debt burden and the government will likely need to spend heavily and take on even more debt as part of the recovery process. Given that every currency has its weakness and people have to invest their funds somewhere, even in this time of global political and economic turmoil, evaluate the extent to which the disaster will reduce the yen’s role as a safe-haven currency.
3. The Japanese economy was recently eclipsed by China as the world’s second largest economy, the spot Japan had held since 1967. Will the focus on rebuilding stimulate economic growth or push the Japanese economy even lower? Discuss the factors that will make the business recovery in Japan difficult.
4. How will the events in Japan impact the global economic recovery?

SOURCE: Shah, N. (2011, March 14). Japanese act to back yen; Nikkei sinks. Wall Street Journal Online. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704893604576198210987163764.html)

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N the Know: How will the earthquake in Japan affect the Japanese economy?