Europe Economy

Strong Yen Is Dividing Generations in Japan

Kosuke Okahara

As Japan has ceded dominance in industry after industry that once lifted this nation to economic greatness, there has been plenty of blame to go around. A nuclear disaster that raised energy costs. A lack of entrepreneurship. China’s relatively cheap work force.

A bank teller counts 10,000 yen (118 USD) bank notes in Tokyo on September 22, 2010. The USD tumbled against the yen in Asia after the US Federal Reserve indicated it was prepared to take further measures to boost a faltering economic recovery. The USD fell to 84.80 yen in Tokyo morning trade, down from 85.15 yen in New York.
Yoshikazu Tsuno | AFP | Getty Images

Increasingly, however, business leaders point to a problem that is at least partly within the government’s power to control: a high yen that has made Japanese products, from televisions to memory chips, prohibitively expensive abroad. In an echo of a debate that raged in the United States in the 1980s, the government faces growing criticism for doing almost nothing to rein in the yen, despite alarm that the record-high currency is dealing crippling blows to the country’s once all-important export machine.

One big reason, analysts and some politicians say, is simple, if generally left unsaid: A high yen benefits Japan’s rapidly expanding elderly population, even if it hurts other parts of the country.

By speeding the flood of cheaper imported products into Japan, the strong yen is contributing to deflation, a broader drop in the prices of goods and services that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the baby boom who make up more than a quarter of the population and tend to vote in high numbers.

“Japan’s tolerance of the strong yen and deflation is rooted in a clash of generations,” said Yutaka Harada, a professor of political science and economics at Waseda University in Tokyo. “And for now, the seniors are winning.”

That victory comes at a high price, however, hastening the hollowing out of Japan’s industrial base as companies continue to move abroad, exacerbating the nation’s two-decade-long economic stagnation.

On Monday, the government released the final draft of a new economic strategy that it contends will help break what it described as a vicious cycle of a strong yen and deflation. But even though the long-awaited plan identifies the heart of the problem as Japan’s aging population and declining export prowess, analysts said the government’s modest approach fails to take on the entrenched interests, including the elderly, that have long stood in the way of fundamental change.

Japan can trace the start of the yen’s latest rise to the worldwide economic panic that began in the United States and spread to Europe. Just before the first tremors of the American housing crisis appeared in 2007, the exchange rate stood at 123 yen to the dollar , as the Bank of Japan kept interest rates low to stimulate growth, and money flowed out of Japan in search of higher returns.

After the crisis began, raising doubts about the soundness of American and European banks and the ability of governments to stand behind them, the tide of money reversed. Japan, with its huge security cushion of domestic savers, became a haven for investors, driving the yen up.

The yen hit a postwar high of about 76 to the dollar in February and today remains not far from that level, trading Wednesday around 78 to the dollar. It would not be easy to reverse the value of Japan’s currency; worldwide macroeconomic trends currently favor a strong yen. Nor are most experts suggesting that consideration of the elderly is the only cause of political paralysis over how to revitalize the economy.

But breaking that stalemate is becoming harder as the elderly’s political clout grows. Even some retirees reveling in the benefits of the government’s inaction see the long-term quandary.

Shigeru Ono, a retired oil company manager who won a small following blogging on deflation’s virtues, can tick off the strong yen’s advantages, including lower prices for shirts made in Vietnam and the Chinese flat-screen television he bought recently. He is also clear on the perils.

“The strong yen and deflation have been a boon for us baby boomers,” said Mr. Ono, 62, who is living on limited savings and a fixed monthly pension of 130,000 yen, or about $1,660. “But I also know that they cannot be good for my son’s generation.”

The office of Prime Minister Yoshihiko Noda has defended the government’s handling of the currency, not only by presenting its new plan, but also by pointing out that companies have been offered $6 billion in subsidies to help them move into higher-end products less affected by competition from other Asian exporters.

The Finance Ministry, meanwhile, has taken small steps to drive down the yen by buying a total of $200 billion worth of United States currency during the last two years. But officials said its efforts were never intended to do more than blunt surges driven by speculators.

A more effective step, economists said, would be for the Bank of Japan to essentially turn on the printing presses, encouraging the currency’s value to drop. The Federal Reserve has done just that in response to the financial crisis and the economic weakness in the United States, keeping down the dollar’s value and helping to foster a strong rise in American exports.

Critics say the central bank’s entrenched bureaucrats have resisted doing something similar in recent years out of an outdated fear of rekindling the rampant inflation in the value of real estate and other assets of the 1980s bubble economy. But the bank argues that it makes little sense to intervene without longer-range economic fixes, like deregulating protected domestic industries to spur competition.

As such debates rage on, the supercharged yen bolsters the ability of Japanese to buy foreign goods and to travel abroad, but continues to eat away at the foundations of the economy, hurting companies from mighty Toyota to small ones like Kyouwa, a manufacturer of factory automation equipment in rural Seki, west of the rust-belt city of Shizuoka.

Kyouwa’s second-generation owner, Ryuji Usuda, said he finally decided, after he lost an important Japanese customer last year to a Korean rival, that he had no choice but to move his production line to a new factory in Vietnam. He said the plant would allow him to make machines for 30 percent to 40 percent less than in Japan.

“Pretty soon, nothing will be made in Japan anymore,” said Mr. Usuda, 40, who noted that many of the Japanese factories he supplied were also moving to Southeast Asia.

Last year, the influx of products from abroad contributed to Japan’s first annual trade deficit in 31 years.

Some members of Parliament, including some from the governing party, have become worried enough to begin organizing a sort of political insurgency, proposing ways to fight the strong yen. But they have made little headway in changing the underlying political calculus.

“The strong yen robs from youth, but there is not much awareness here yet of generational inequalities,” said Keiichiro Asao of the opposition Your Party.

One way to spur such awareness, critics say, would be to allow national pension payments to drop with falling consumer prices, as the law demands. But the government ignored the law for years rather than upset elderly voters.

Last year, it finally took a baby step, slightly trimming pension payments. The loss of just a couple of dollars a month, though, was enough to start Mr. Ono, the blogger, rethinking. “Now I am starting to realize that deflation can be bad, too,” he said.