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The Yen And Restarting Japan's Nuclear Reactors

http://seekingalpha.com/article/2038083-the-yen-and-restarting-japans-nuclear-reactors?source=google_news


Japanese Prime Minister Shinzo Abe's Abenomics has largely been driven by aggressive monetary easing initiated by the Bank of Japan (BOJ). The BOJ has aggressively expanded its balance sheet in hopes of increasing inflation, weakening the Yen (FXY, JYN, YCL, YCS), and driving down real interest rates. While the BOJ has succeeded on all three fronts, the efficacy of increasing inflation and weakening the yen to the benefit of the broader Japanese economy has been unresolved.

The Inflation-Currency Link

Inflation and a weaker currency are of course interconnected. A weaker currency pushes labor costs down and makes exporting goods easier. However, it also imports inflation due to the higher import prices, thus decreasing purchasing power. Often times as imports grow more expensive, consumers can substitute cheaper domestic alternatives and thus improve the country's balance of trade. Conversely a strong currency pushes labor costs up, makes exporting goods more difficult, but also increases the consumer's purchasing power. Export-oriented countries such as Japan have typically favored a weak currency as they have historically subscribed to a mercantilist mindset.

With regards to inflation, the aggressive monetary policy by the BOJ has accelerated inflation somewhat in Japan. Furthermore, there are some signs that the increase in consumer goods may make its way to wage inflation as workers negotiate a higher wage due to a higher cost of living. However, without commensurate wage inflation, it is doubtful that an increase in inflation will be welcomed by the Japanese consumer. Even now, over 70% of Japanese polled have not been feeling the benefits of Abenomics, while Japanese exporters have been ecstatic about the weak Japanese Yen.

As noted above, a weaker currency would be expected to help Japan's balance of trade. Unfortunately Japan's most important import is energy. Japan has limited domestic energy resources and domestically only produces roughly 15% of its total energy needs. This reliance on imported energy has been amplified by the shuttering of Japan's 50 nuclear reactors due to the nuclear meltdown at Tokyo Electric Power Co's Fukushima facility in 2011. Nuclear energy accounted for 30% of Japan's electricity and was Japan's greatest source of domestically produced energy. The impact of the falling Yen and greater need for imported energy sources have been apparent in the recent trade deficit reported in Japan as crude oil imports rose 28.1% and liquefied natural gas rose 21.4% from a year earlier. While Japan has always had to import energy, the shuttering of nuclear reactors have made energy imports even more inelastic with no viable substitutes to be produced domestically.




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