By: Dr. Mike Campbell

The Tankan study is commissioned by the Bank of Japan on a quarterly basis. It takes the pulse of business sentiment expressing the outcome as the percentage of positive views minus the percentage of negative opinions. The index has fallen from plus two to minus four, indicating that the sentiment of large scale manufacturers has taken a turn for the worse. Japan exited a formal recession last quarter, largely on reconstruction efforts following March’s devastating earthquake and tsunami.

The effect of loss of confidence in the Euro and continuing concerns about the strength of the US economy has been that the Yen has been seen as a safe haven currency, pushing up its value and making Japanese exports less competitive in importing markets. As noted above, Japan has just emerged from recession and it is battling deflation. Its unemployment level is low by the standards of its competitors, but is high by Japanese standards. The population is aging which will send social security costs higher. Japan’s level of public debt is the worst in the developed world at more than 200% of GDP; something like $8.6 trillion. The magnitude of the problem makes the worries of the Italian and Greek debt crisis seem trivial in comparison. The Yen is not so much a safe haven as a time bomb with a faulty timer which could go off at any time give a strong enough economic vibration.

In order to circumvent the worst of the high Yen problem, some manufacturers are moving production out of Japan to cheaper (non-Yen denominated) labour markets, but this will lead to higher unemployment at home and do nothing for flagging Japanese consumer confidence.

Once the current unpleasantness with the Euro is resolved (one way or another) market sharks will focus their attention on the US and Japanese debt problems which make the Euro crisis seem little more than an hors d’oeuvre.