The Underdog

Today is a special non-working holiday in South Korea (yey to Wednesdays!) because of the country’s elections. I therefore had the privilege to execute such a loser’s act, when I went out to buy dollars today. Of all days, good Lord.

The USDKRW exchange rate in Mid-May has since climbed to the 1,200 spot, and it's been a bad fifth month of the year considering April's rate, which was just around 1,125. Now we all know that North Korea is to be blame for all this, apart from that crisis in Europe. Forecasts of 1,240 for the Korean won by the end of June even came about. So in anticipation of further depreciation, I went ahead and exchanged some amount that I can send back home. I just didn't expect that it would overly jump to almost that 1,230 peak in just a day with this news from another Asian neighbor.

Prime Minister Hatoyama Resigns
Barely making it a year in office, Prime Minister Hatoyama announced in June 2 that he is stepping down. He’s the fourth Japanese prime minister to resign from the top position since 2007, and this immediately spurred fear of more political and economic uncertainties.

The current political instability is making Japan’s weak economy dependent on the Bank of Japan’s loose monetary policies, which is still not effective due to threats of deflation bulging in.

Due to Failed Social and Security Issues: Recent Japan-US Relations
The United States has long asked Japan to have its marines stay put in Okinawa as part of its global military strategy. Prime Minister Hatoyama initially said that he won’t allow it, but after back-and-forth negotiations, Hatoyama said he had no choice and gave in to maintaining US military visibility in the said city. This offended some coalition partners and disappointed local citizens, and in less than a year of unclear economic policies along with the already failed social and security issues, Hatoyama resigned.

New Prime Minister Needed the Soonest Possible Time

There springs Mr. Naoto Kan, the current finance minister, which most people believe will be the economic driver needed to compensate for the social and security failures that Hatoyama brought in his eight months of public term. Mr. Kan has been outspoken in favor of a weaker yen, which analysts see would boost exports. He has also been associated with the hopes of a PRO-growth economic policy, which Japan badly needs, given the deflationary threats on its economy.

PRO-growth economic policy
1.) Tax cuts for corporations are to be considered.
2.) Promoting and reasserting its global standing in infrastructure and high-technology
3.) Establishment of domestic policy that entices entrepreneurship and more favorable business conditions

I won’t be surprised if Japan continuously clamors for such growth, at this time (or more so at this time) when the whole world still sees Japan with its “Lost Decade” slogan. Since the gradual asset bubble collapse (high land values at almost 0% interest rate— very cheap credits!) of the country, Japan has practically become the economic underdog.

While these new hopes for better economic policies come out from Hatoyama’s resignation, there are the inevitable uncertainties that Kan’s new character seem to bring to the table. Mr. Kan’s gained the impression of being quite flamboyant and of taking contradicting statements.

Japan’s Long-Term Economic Challenges

1.) Public debt is more than 150% of GDP: It is already of common knowledge that inflation can always raise the rate at which the government has to repay the bonds that it issues (money that it borrows). Lucky that the Japanese had the common sense to save more than spend, which helped in easing inflationary pressures. Yet Japan’s fiscal debt issues resurface in anticipation of the retirement of its growing aging population. This can always spur back pressures on inflation.

2.) Deflation: There are always those two sides of a coin with deflation. There is the good kind of deflation brought about by surplus expansion and the bad kind brought about by demand shrinkage. The latter has apparently slapped on Japan pretty hard, given less consumption from the frugal Japanese. And I need not elaborate more on how constrained consumption is downright bad for any economy’s growth.

This is why I want to go and visit Japan. I have always been for the underdogs. I want to know how the country is.

And so with this little story and that underdog sentiment, the yen (and almost all Asian currencies) went down against the US dollar. Oh, and guess what. The next day I will find out that the Won goes back to 1,200 to a US dollar. Pfft!