by Michael Zielenziger
When British voters trooped to the polls last month to wrest themselves out from the European Union, few residents of Manchester or Birmingham wondered what effect their vote might have on Mr. Watanabe who works in Osaka.
Yet the consequences of the Brexit vote have already ricocheted across the Pacific, seriously complicating the challenges for a Japanese economy still trying to emerge from long-term stagnation and intensifying the pressure on Japanese corporations to “get out of Dodge” and move their money offshore. The vote demonstrates again how a ripple of change in one part of the world can generate tsunamis of unexpected consequences thousands of miles away.
At first glance, the relationship between the Brexit vote and Japanese society would seem hard to fathom. Yet in a world that is increasingly connected by trade linkages, money flows and supply chains, what happens in Britain can generate unforeseen turmoil elsewhere.
The decision this week by Softbank, the Japanese mobile phone conglomerate, to bid an audacious $32 billion to acquire ARM Holdings, the British semiconductor designer behind many iPhone chips, is only one manifestation of the impact of the Brexit vote on Asia. But that deal by itself helps explains a lot about what is taking place behind the headlines. Yes, Softbank wants to expand into semiconductors, but the timing was undoubtedly accelerated by the macro-economic climate Brexit changed.
To better disentangle this complex relationship, a little context is in order: Japan has been battling with falling prices, industrial stagnation and an aging population for many years now. Having gone through an economic collapse in the late 1980s, it has spent the better part of the last 20 years trying to regain its mojo, and yet its annual growth rate barely ever tops 0.7%. (Full disclosure: for a fuller understanding of Japan’s long-term malaise you can consult my book Shutting out the Sun: How Japan Created its Own Lost Generation).
Shinzo Abe, Japan’s Prime Minister, came to office in December 2012, promising to revitalize Japan’s economy by boosting government spending, reducing interest rates to zero, and promising widespread liberalization of an economy that has often protected inefficient (and politically powerful) industries like agriculture and retailing through massive deregulation.
Naturally the first two “arrows” in Abe’s quiver were easier to implement. The Japanese love to use government monies to keep construction workers employed, and the Bank of Japan was happy to impose a zero interest rate policy that is now being mirrored by other central bankers around the world.
The unstated piece of Abe’s economic agenda, however was to massively weaken the Japanese yen in order to give a steroid injection to Japanese exporters. When the yen falls,exports by Toyota, Honda and Sony become cheaper to consumers in other markets across the world. And indeed, a weak economy would suggest a weakening of the currency would help Japan sell more products abroad. At 123 yen to the dollar, a Honda Civic is a lot more affordable to a consumer in Bangkok or Bakersfield than when the yen is closing in on 100.
Cut to the Brexit vote: Within days of this somewhat unexpected vote to break away from the EU, investors sought to get their money out of the British pound and put it into other “safer” currencies, like the US Dollar and the Yen. Within days, the yen, which had traded at nearly 120 at Christmas, was nearing parity –- 100 to the dollar.
In the last few days, the currency has rebounded slightly – but it’s still far more expensive than it should be, given the short- and medium-term economic prospects for Japan. The combination of a Brexit-induced slowdown expected in Europe and the rapid appreciation of the yen means the outlook for Japanese growth, which was lackluster to begin with, has been trimmed further. (Oxford’s own economists now forecast GDP growth of a miniscule 0.1% for the year, a 50% reduction from our earlier projections) as the rising yen puts corporate profits at risk.
Sure, the strong yen certainly hurts Japanese exporters. But it makes foreign acquisitions far less expensive –and therefore far more attractive-- for Japanese companies like Softbank looking for productive investments for their yen.
So while some have speculated that the Softbank purchase reflect a sudden weakness in the British pound, it is also a calculated and rational response to the fact that the value of the yen has been surging in recent weeks. Across Japan, big corporations are figuring out how to get their overvalued currency out of the country before the yen drags down again.
Best to spend that currency before it weakens again.
Michael Zielenziger is a Managing Editor of Thought Leadership. He has worked on a range of topics including the impacts of globalization, workforce issues, the interactions of media and technology, the changing US healthcare environment, and the prospects for emerging markets, with a special focus on Asia.