Thai Floods, Strong Yen Wreak Havoc on Japan

A perfect storm of macro-economic uncertainty, currency environment and natural disaster has coalesced to put the Japanese economy in a precarious position. Japan saw contracted production, shipments and inventory in November. Figures just released by the country's Ministry of Economics, Trade and Industry showed a 2.6 percent decline in industrial output for the month. The contraction, the first in two months and a significant overshot compared to a forecast of just 0.8 percent, was largely fueled by supply disruptions resulting from Thailand floods.The hardest hit sectors in Japanese industrial production were the automobiles and electronics as Thailand's devastating floods put Japanese-run operations and vital parts suppliers in the country largely out of commission. Car and other transportation equipment production fell 9.5 percent while information and communications equipment slumped as much as 25 percent. Although Ministry-surveyed manufacturers expect production to pick up over the next two months--4.8 percent for December and 3.4 percent for January--as supply lines reestablish on their Thailand operations, the end of woes was not a supply-only. Weakened demand for Japanese product has been a more systemic threat as it has seen a slump both internally and externally, stemming from weakened wage growth, continued deflation, a strengthened currency and European uncertainty.A stronger Yen has had a particularly pressurizing effect on the all-important export sector in Japan as it erodes earnings of manufacturers such as Toyota, who cut its profit targets significantly, and Nintendo, who is predicting its first annual loss in three decades. At the same time, action on the part of the Japanese government to attempt stemming Yen gains earned it a reprimand from U.S. Treasury, which sees the currency manipulation in the same light as action from China to control its currency. Japan has sold at least 14.3 trillion yen ($183 billion) so far this year and has pledged to do more, despite the ramifications resulting from butting heads with their US trading partners. As a stronger Yen drives investment outside of Japan, pressures are felt in the domestic market in the form of depressed wage growth, rising unemployment and continued deflation, which have had a throttling effect on internal demand for products. Although unemployment was shown to have remained stabe at 4.5 percent, Japan stands to lose 600 thousand jobs, which would increase the headline number by 1 percent if capital migration continues amid the strength of the currency. Household spending fell 3.2 percent in November from a year earlier. Retail sales saw a similarly forecast-beating 2.3 percent contraction.What current problems will mean for the continuation of Japan's competitiveness in the world remains to be seen. A hint of this may be seen in headwinds met by the country's leading automaker, Toyota, which this year is expected to relent its ranking as the worlds largest automaker to General Motors (NYSE: GM).