Why has the Yen Gone Through the Roof?

Last week: The U.S. Leading Economic Index is pointing to continued economic expansion this spring and into the summer. The price of gasoline keeps climbing, but consumers are more concerned about the cost of filling up the grocery cart than filling up the gas tank. And if the labor market is opening up another 150,000 or more jobs in March, consumers’ concern about either price hike will not keep them from spending on new spring apparel.

The revised estimate of 2.8 percent annualized growth in GDP in the last quarter of 2010 is not likely to be sharply revised. This report however carries the first estimate of corporate profits in that quarter. It is likely to show a gain of about 6.5 percent. While overall economic growth in the first quarter could again come in at about a 2.8-percent pace, profit growth is very likely to be somewhat slower, as higher costs eat into margins. Part of the economic story in 2011 is about how well margins hold up, allowing business to invest and hire.

THE SITUATION ABROAD

The global economy had been on track to grow by about 4 percent this year. Events in the Middle East and disasters in Japan could result in somewhat less growth in the first half while recovery efforts could boost growth in the second half. Among other consequences, trade, which has been growing much faster than GDP, could be interrupted in the first half of 2011. Japanese manufacturers produce key upstream components in the electronics supply chain. Disrupted production schedules there may limit part production and in the process cause problems for Chinese exporters. Global exports were rising at a 17-percent annual rate in the fourth quarter of 2010. They were on track to grow even a little faster in the first quarter of 2011. They are still likely to be growing strongly. Indeed, trade from Latin America was growing faster than trade from Asia. Clearly that is likely to still be the pattern going into this spring. Trade from all of Africa was brisk, though a little slower than either Latin America or Asia. Trade in North America and in Europe was slower still though quite robust. Overall, the unrest and natural disasters will have a measurable but limited impact on global growth and trade, with the prospect that recovery could add some momentum as early as this summer.

FACT OF THE WEEK

More. The Pew Project for Excellence in Journalism issued its annual State of the Media report this week. The survey showed that, for the first time ever, more Americans receive consumer news from the internet than from newspapers. Some call this progress. Some don’t.

QUESTION OF THE WEEK

Stock markets sold off sharply in the week since the earthquake hit in Japan. But why has the yen gone through the roof?

Global uncertainty always causes financial retrenchment. The immediate decline in stock markets across the globe represents a kind of risk-averse pullback until the extent of the damage is clear. The rise in the value of the yen could be representing a quick spike as money floods into Japan. Foreign companies with operations and employees in Japan need to facilitate what steps may be needed for the wellbeing of their workers and assets. Even Japanese companies are sending money to their home offices for much the same purpose, and at the direction of these home offices. Management could be gathering cash as they assess needs in the wake of the disaster. These efforts are resulting in a temporary spike in the yen, to be followed by a somewhat sharp pullback. But this early, it is hard to assess how much damage there has been, how much and what kind of immediate help may be required, and where all this goes long-term.

The general consensus is that shocks like earthquakes or hurricanes tend to have relatively small economic consequences on national or global economies. And these impacts tend to be short-lived, perhaps a quarter or two, followed by economic boosts from reconstruction efforts. That is already evident in the case of the earlier Chilean earthquake and likely to be the course in the wake of the Christchurch New Zealand earthquake, or the Australian flooding.

To be sure, Japan suffered an earthquake, tsunami, nuclear crisis, and power shortages shutting down some factory work. For all that, it happened in a period of relatively weak Japanese economic activity. The disaster-induced drop in the level of activity is therefore likely to be more limited than if Japan’s economy were more robust. The global economy indeed has been relatively stronger and thereby better able to absorb the impact of somewhat slower activity in Japan.

Estimating the loss of equipment and facilities is one thing. Markets almost always overreact and then quickly change course. Assessing the impact on consumers is a different matter. Survivors of disasters take time to recover. Observers of disasters can also take some time assessing what happened and what lessons they may take from these events. The cost and potential impact of changed perceptions is the longer lasting and more difficult assessment. It is simply too early to complete that exercise only a week after the shock occurred.

Courtesy of The Conference Boards