Merryn's Blog

How a yen collapse could be good for Japan’s consumers

We tend to think of currency collapses as being bad for a country’s consumers. But in Japan, the opposite might be true.

There is much talk at the moment about the possible coming collapse of the yen (if Mr Abe wins the Japanese elections on Sunday he has said he will work to debase the currency).

This might be a good thing for the stock market. But weak currencies are also generally a bad thing for consumers: when our currency weakens, the prices we pay for our imports go up in our currency, and we are automatically made poorer (this is exactly what has happened in the UK over the last few years).

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But an interesting perspective on how this might play out in Japancomes from GK Research. Over the last few decades, the Japanese have invested large amounts of money outside the country both as savers and corporate investors. So much so, in fact, that "the flows of income from abroad are quite sizable".

That means that a big fall in the yen (which would push up the purchasing power of foreign currency repatriated to Japan) would have not a negative but a positive wealth effect "thus boosting consumption."

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Japan then is a country "where consumption could go up after a devaluation." That gives policy makers even more of an incentive to "gamble on debasement" than they already have.

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