Japan’s GDP in dollar terms regresses back 30 years
International Business News – Japan is shrinking in dollar terms. If calculated at 140 yen per dollar, Japan’s nominal gross domestic product (GDP) in 2022 is expected to fall below $4 trillion (about 560 trillion yen) after about 30 years, essentially the same as Germany in 4th place. The Nikkei average index in U.S. dollar terms has fallen by 20% this year. Wages have also fallen back 30 years, making Japan’s purchasing power and talent attraction less attractive. Based on high value-added industries, it has become an urgent task for Japan to shift to an economic structure with rising wages and a strong currency.
The Organization for Economic Cooperation and Development (OECD) forecasts that Japan’s nominal GDP this year will be 553 trillion yen. If converted to U.S. dollars at 140 yen per dollar, it would be $3.9 trillion, 29 years below $4 trillion since 1992. The average exchange rate for the period at this stage is about 127 yen, but if the yen continues to depreciate or hover low, it is possible that it will fall below $4 trillion this year and next.
The size of the Japanese economy in dollar terms has returned to the post-bubble collapse. Global GDP has quadrupled during this period, while Japan’s share, which was previously more than 15 percent, has shrunk to nearly 4 percent. Japan had more than $6 trillion in 2012, 80% higher than Germany, but now tends to be flat.
Economic growth and boom are linked to GDP in yen terms. Even if this year’s dollar-denominated GDP decreases by 20% compared to 2021, it is not particularly bad. However, international comparisons in dollar terms become an indicator of “national strength” with a long-term perspective.
According to Professor Emeritus Yukio Noguchi of Hitotsubashi University in Japan, “a devaluation of the currency will reduce ‘national power’. It will be difficult to attract human resources from overseas and will hinder economic growth.”
If the average annual wage is $30,000 at 140 yen to the dollar, it is a step backwards to around 1990. For foreign workers, the attractiveness of working in Japan is declining. In terms of depreciation against the dollar this year, the yen is higher than South Korea’s won, and the average dollar-denominated wage is essentially the same as South Korea’s. In contrast, there was a twofold difference in 2011. It has reversed if calculated by purchasing power parity taking into account the price differential.
In addition, the energy price hikes that have shaken the world economy have hit countries with devalued currencies hard. The dollar-denominated WTI (West Texas Intermediate), a representative indicator of crude oil futures, is up 13% from the end of last year. Yen-denominated crude oil futures on the Tokyo Commodity Exchange (the most actively traded settlement month) rose by an even greater 33%.
The yen depreciation situation used to be characterized by foreigners betting on the growth of corporate earnings and buying Japanese stocks, but this trend is now also missing.
Foreigners sold a net 2.7 trillion yen of Japanese stocks from January to August of 2022. Compared with the Bank of Japan launched large-scale monetary easing, there was a rapid depreciation of the yen in January to August 2013 net buying more than 9.1 trillion yen, the situation has completely changed. Richard Kaye of France’s Comgest Asset Management said that “it is impossible to pass on the increase in procurement costs to prices and there are cases of falling corporate profits”, alerting to the negative impact.
In terms of the U.S. dollar, which is used by foreigners to assess investment performance, the Nikkei average has fallen 23% this year, hitting a new low since 2008 (42%), when the financial crisis erupted, in terms of the annual decline, and the value of Japanese assets is declining sharply from the perspective of overseas investors.
The depreciation of the yen will improve the competitiveness of Japan’s exports, while also serving as an incentive for direct investment and tourists from overseas. It also has a positive impact in terms of stimulating the economy. However, Japan’s policy of pursuing the depreciation of the yen after the 1990s has led to a decline in industrial competitiveness due to insufficient investment in IT (information technology), etc. Ryutaro Kono, chief economist at BNP Paribas Securities, said, “If the number of companies that can hardly survive without maintaining the depreciation of the yen increases, overall productivity will decline, inviting low wages.” If we rely excessively on the support of yen depreciation and monetary easing, the decline of national power will be difficult to stop with a negative attitude in terms of reform.