The US Debt Crisis and Japan
July 28, 2011 6 Comments
There has been a lot of talk these past few weeks about the possibility of the US defaulting on its debt obligations and the government’s need (or in the eyes of members of the Tea Party, lack thereof) to raise the debt ceiling.With both parties caught in a state of political deadlock, the probability of the former is growing with every passing day a deal isn’t brokered.
It would be unnecessary to explain exactly why default would be bad for the US economy. That much is evident to even those who do not follow the news. What isn’t as obvious is this: how will a US default on its debt obligations affect Japan, the Japanese economy and its people?
Let’s start with the basics: currency. With the current uncertainty about the future and state of the American economy and with the ongoing debt crises in major European countries, many investors are fleeing Western countries to safer havens. One such haven is Japan, as the yen rose to 77.95 yen per US dollar. Fundamental economics knowledge dictates that a higher yen yields more expensive exports from Japan, thereby negatively impacting Japanese exporters and those who work for such companies. Expect the government to print more money to ease pressure on exporters if the pattern of the strong yen continues in the mid to long term. Job prospects will likely weaken, and unemployment figures will remain where they are, if not experience a rise in the coming months.
(To those who wonder why Japan’s yen remains strong despite meagre economic prospects and a high debt to GDP ratio, read this article).
It’s also worth noting that the United States is Japan’s second largest import/export partner. As an export-oriented country, Japan will be hard hit if the US defaults on its debt. Take Toyota as an simple but effective example. Toyota makes more money in North America than it does anywhere else. Period. With North America as its largest market and with the United States making up most of the continents’ consumption, Toyota will be adversely affected if Americans don’t have the means to purchase new cars. The same applies to a number of prominent Japanese manufacturers, and devastating effects will be felt by Japanese businesses and by those who are employed under them back in the Land of the Rising Sun and elsewhere around the world.
And that’s just the tip of the iceberg. Also remember that…
- Japan is the second largest foreign holder of US Treasuries in the world.
- Much of Japan’s defence is reliant on US cooperation, which may be scaled back in the event of default and domestic obligations.
- Japan’s major trade partners all have strong ties to the United States, and a US default would filter down to negatively impact these relationships as well.
All we can do now is hope and pray that the United States doesn’t default; for if it does, it spells enormous trouble for Japan and may well be the last push Japan experiences before it’s thrown into its own debt fiasco.