Saturday, December 6, 2014

A Weak Currency is Good for the Economy…Not!

Volume 2,475,623.  (Not really, but...well, you know.)

Apparently corporate bankruptcies are up in Japan; the bankrupt companies blame the weak yen:

Corporate bankruptcies linked to the yen’s slide hit a new record in November, highlighting the strains on small and midsize companies…

Small and midsize companies – no mention of large companies?

While some small firms are struggling to pass on higher costs of imported materials to customers, large exporters are reporting higher profits…

So the big guys are doing OK.

Forty-two of the companies that failed in November cited the weakened currency as a contributing cause, bringing total bankruptcies associated with the yen so far this year to 301, almost triple that of the same period in 2013…

Triple.  Ambrose Evans-Pritchard, are you paying any attention?

The story goes that a weak currency is good for exports.  Lower labor costs and all that.  But what about all of the stuff that needs to be purchased – at global prices – in order to thereafter produce?

It said surging costs of imported food, metals and construction materials are squeezing small companies.

Yes, that is my point.  Once inventory acquired by the stronger currency unit is depleted, it must be replenished via the purchasing power of a weaker currency unit. 

But at least the labor is cheaper – this has to help exports on net, doesn’t it?  I guess you might make a case that it helps exporters of products with a high labor content and a low bill-of-material content – in other words, exporters based in countries with un-developed and low division-of-labor economies (but even here, I doubt it) – for sure not Japan (or the US, or the EU, or the UK, etc.).

Besides the large exporters benefitting with increased exports, consider that a weak currency policy also wipes out the competition for the home market; take out the small and medium sized suppliers, and guess what happens?

Three constituencies benefit, at least to some extent, from a weak currency policy – and even these three are, to a good degree, overlapping:

1)      Large exporters
2)      Multi-nationals
3)      Executives with financial-performance based compensation (options / equity / bonuses)

I have touched on the benefit to the large exporters.  What of the multi-nationals?  Such companies have aligned production more-or-less with the location of sales – in other words, they have neutralized currency fluctuations naturally.  While this may not be a benefit, it certainly minimizes the cost.  How many small to medium sized businesses are structured in a similar manner?

Finally, the executives: large exporters and multi-nationals based in Japan report their revenue earnings in Yen.  For the large exporter, this results in an increase in reported results even if actual performance doesn’t change a bit.  For the multi-national, producing and selling in several jurisdictions world-wide, the result is similar.

For the small- to mid-sized company?  All they see is higher prices for their purchases.  For the average citizen, the same thing.  To say nothing of the value of savings being diminished.

Once again, policies developed for the connected at the expense of most of the rest of us.

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