Invited Response To Jim O’neill’s “A-List” Column In The Financial TIMES June 21st 2011
The world has come to think of Japan as the economic equivalent of Duran Duran – an over-hyped 1980s phenomenon that has fallen into justly deserved obscurity. The triple disaster of 3/11 have challenged these assumptions. Many of the great names of Japanese consumer electronics may indeed be shadows of their former selves, but Japanese companies, sometimes quite small ones, still play a crucial part in the supply-chain behind hot items such as LCD panels and smart phones. The overall macro effect is not negligible. The recent drop-off in US autos sales was caused mainly by the decline in sales of Japanese brands – itself a result of disruption to component production.
It is also worth pondering the fact that the first response of the currency market to the earthquake was to drive the yen higher. In fact since the subprime crisis broke in July 2007, the yen has risen 30-50% against the pound, the euro , the dollar and the remininbi. Economists generally portray GDP in local currencies, by which measure Japan has barely made back half the post-Lehman output loss of 8%. Look at the world in yen, though, and you see a totally different picture the past four years US GDP has fallen 27% in yen terms, and UK GDP 46%. In real money Japan’s economic presence has actually grown.
All that is not say that recent signs of weakness in the global economy can be put down to Japan. The decline of US bond yields below 3% suggests that what we are seeing is not a supply shock, which would be inflationary, but the re-emergence of the deflationary forces generated by the global credit crisis. Recent signs of strain in the Chinese growth story are especially troubling. The possibility remains of the entire world turning Japanese – and not in a good way.