Economy

A defunct slide projector in an empty office and peeling paint in the employee canteen are among the few signs of the role that an industrial site in Buffalo once played in the rise and then fall of American manufacturing. The campus was first built in 1923 for General Motors. A faded poster that reads “diversify, profitably grow and become global” dates from when it was later owned by American Axle & Manufacturing. The car part maker followed its own advice, shifting some production to Asia and later shutting its huge factory in the East Side area of the city in 2008.A site that once employed thousands of people in one of the country’s most deprived communities became a symbol of deindustrialisation and rustbelt decay.Now, however, the same location is starting to come back to life. In one warehouse, workers employed by Viridi Parente, a cleantech firm backed by investors including the UK’s National Grid, are packing lithium-ion cells into metal boxes, making batteries the size of mini-fridges. These will then be housed within office blocks, hospitals or other buildings to provide vital back-up power.Eric Stein, formerly head of JPMorgan’s investment banking and now Viridi’s chief financial officer, says the company aims by 2027 to churn out about 4 gigawatt-hours of battery capacity each year — more than the entire current storage capacity in the UK. For now, the lithium-ion cells packing the batteries are shipped in from Asia. But that will change when South Korea’s LG Energy opens a new battery plant in Arizona.It is the kind of project that the White House wants to see sprout across the US, especially in the industrial areas that were ravaged during the globalisation era of the past four decades — a process which was facilitated by policies put in place by both Republican and Democratic presidents.The new approach is spearheaded by two laws passed within days of each other last August — the Inflation Reduction Act and the Chips and Science Act — along with the Infrastructure Investment and Jobs Act, passed in late 2021.Combined, they offer hundreds of billions of dollars of subsidies, grants and loans to spur new investment in broadband networks, semiconductors, electric vehicles and batteries. Since the bills were passed, there has been a growing realisation that their significance goes well beyond their immediate impact on specific industries. They also represent a profound shift in economic thinking in America. Four decades after Ronald Reagan rejected large-scale US government intervention in the economy, Biden is embracing it wholeheartedly with a raft of subsidies for domestic producers in strategic sectors, in the hope of creating hundreds of thousands of new jobs. And 30 years after Bill Clinton signed the Nafta trade agreement and paved the way for China to join the WTO, Biden is no longer pushing for sweeping trade liberalisation.“I don’t think you’ve seen something of this magnitude since Reaganomics came on the scene,” says Jennifer Harris, a former Biden administration official who worked on international economics at the White House National Security Council. “We’ve been living in that intellectual box and under those policymaking constraints for 40-plus years, and so this is really shaking those off towards the next turn of the screw.”For the administration, economics is mixed with foreign policy — the laws are designed to both reverse the shift of manufacturing jobs to China, while also blunting China’s competitiveness in clean energy and tech. “This vision is a fundamental break from the economic theory that has failed America’s middle class for decades now,” Biden said in a speech at the Old Post Office in downtown Chicago last month. In a two-part series, the FT is looking at the implications of the Biden revolution in economic policy. On Thursday, we will examine how the new burst of industrial policy in the US has unsettled some of its closest allies in Europe and Asia and forced them to adapt to Washington’s attempt to rewire the global economy. The question in this first piece is whether the policies will transform the US economy in a way that is durable and which will have the sort of tangible impact that resonates with voters.The FT calculates that more than $200bn worth of projects have been promised since the IRA and Chips Act passed. Developers say as many as 85,000 jobs will be created.

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Jon Williams, Viridi’s chief executive and a Buffalo native, pays his employees $18 an hour, with healthcare, stock options and a retirement plan included. For some of the workers it is their first job — a lifeline in an area stricken with social problems. “Industrial America just abandoned these communities,” says Williams. But at the moment, its operation is limited in scale — it employs just 140 people.Heather Boushey, a member of the White House council of economic advisers, says there have been encouraging signs that the strategy is working on the ground. “We’re seeing businesses say, ‘Great’,” she says. “They are starting to announce these investments and we’re starting to see shovels in the ground. And those are the kinds of early indicators that we are looking for.”A long time in the worksIf the Biden approach amounts to a transformation in US economic policy, it has been a shift that has been building for some time.The roots are in the financial crisis of 2008-9, when American confidence in laissez-faire economics was badly dented. The sluggish recovery that ensued was tarnished by anaemic labour markets and stagnant household incomes, leading to a sense of malaise that many believe contributed to Donald Trump’s victory in the 2016 election against Hillary Clinton. Trump used his presidential inauguration address to call for an end to the “American carnage” of “rusted out factories”. He passed a big tax cut that cheered corporate America but on the trade front there was huge upheaval: he forced a high-stakes renegotiation of Nafta with Canada and Mexico, then launched tariff wars with China, the EU and other US trading partners around the world, in defiance of the traditional Republican approach to global commerce. By the time Biden entered the White House in 2021, the mood had shifted even further. The pandemic had revealed the potential vulnerability of US supply chains, while geopolitical tensions with China rose sharply. Russia’s full-blown invasion of Ukraine then sent shockwaves through global energy markets.And Biden — who was born in the rustbelt city of Scranton, Pennsylvania — made it his mission to provide massive subsidies for industrial America as the solution to maintaining both US economic primacy in the world and prevent further lurches towards forms of populism that could undermine democracy. President Biden at the Cummins Power Generation facility in Minnesota in April, part of his 20-state tour to promote an economic agenda that focuses on clean energy and infrastructure jobs © Elizabeth Flores/Star Tribune/Getty Images“I think the Biden camp really sees questions of trade and industrial policy as tools to a set of higher ends, or broader national aims, whereas [traditional Republicans and longtime Democratic policymakers] see markets as an end to itself,” says Harris. Biden frequently cites predecessors from the early and mid 20th century — including FDR and Dwight Eisenhower — as the inspiration for his economic agenda, given their use of the government’s muscle to boost America’s economic potential in manufacturing and infrastructure. Since so much time has passed since then, his top officials have in recent weeks carefully crafted an intellectual framework to accompany it. Janet Yellen, the US Treasury secretary, has dubbed it “modern supply-side economics”. “[It] seeks to spur economic growth by both boosting labour supply and raising productivity, while reducing inequality and environmental damage,” she said.

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Jake Sullivan, Biden’s national security adviser, called it a “modern industrial and innovation strategy” insisting that it would “ build a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere” in the globe, fending off criticism that America was reverting to protectionist policies it long decried. But the need to compete with China, which also offers massive industrial subsidies, is a main driver of the shift in Washington, one that is recognised by both parties. “Let’s be clear: winning the competition with China should unite all of us,” Biden told Congress earlier this year.Too ambitious?The Biden agenda has a lot of ambitious goals: to rejuvenate US industrial hubs, reorient global supply chains, decarbonise the American economy and drive down energy costs. Is it realistic to try and achieve these objectives all at the same time?Some Republican critics believe the large-scale government spending, particularly in the IRA, constitutes a “reckless tax-and-spending spree” that will only worsen inflation in what some see as an already overheated economy. Labour shortages are one potential obstacle. Contractors fret that a stretched labour market will be overwhelmed with projects, increasing costs and slowing schedules.

Red tape is another. Clean energy executives and fossil fuel developers are united in calls for reforms to make permitting of infrastructure such as transmission lines easier.“We need a better process for connecting new generation to the grid,” says Greg Wetstone, the president and CEO of the American Council on Renewable Energy. “We’ll continue growing — the real question is are we going to be able to realise the full potential [of the IRA].”“You can invent brilliant widgets. You can create wonderful business models, but the long pole in the tent is labour,” says Tracy Price, chief executive of Qmerit, an energy installation service. “[But] if somebody can’t install it, maintain it . . . it doesn’t matter.”For all the talk about competing with China, the US remains a minnow in cleantech manufacturing and an also-ran in the supply of the critical minerals and parts needed for the energy transition. In solar power, for example, US efforts to limit China’s presence in supply chains have already proven difficult. Last year the Commerce Department launched an investigation into tariff-dodging by Chinese suppliers. But when this led to the first drop in solar installations in four years, the White House was forced under pressure from US developers to suspend the probe.China also dominates the supply of parts for electric vehicles — one reason why Chinese company CATL, the world’s largest battery maker, remains so prominent in the US auto sector. The underlying concern of some analysts is that the effort to break dependence on China will slow down the efforts to decarbonise.“It would be very difficult, very expensive to try to cut off all Chinese supply chains,” says Mark Wakefield, an analyst at consultancy AlixPartners. “It’s very impractical.”Wendy Edelberg, director of the Hamilton Project at the Brookings Institution, says the objective is to engineer a “pretty speedy transition” to electric vehicles and renewable energy. “The more expensive we make those imports or the harder we make it to have those imports . . . the slower that transition is going to be,” she says. A wave of Asian investmentThe hope within the Biden administration is that the forces it unleashed will nonetheless prove lasting in expanding America’s productive capacity. GE, which once embodied the shift of manufacturing overseas under late CEO Jack Welch, is among investors which are capitalising on the IRA’s tax credits and the market opportunity created by the US’s clean energy shift to build new plants. One GE facility to make nacelles — the gearboxes for wind turbines — is in the works in Schenectady, New York, where the company’s roots date back 130 years to Thomas Edison.The hourly rate for workers is “certainly more expensive in New York than it would be in other locations,” says Scott Strazik, chief executive of Vernova, GE’s energy unit. “But there are incentives to build in the US . . . that’s real.” The new $50mn facility will employ 160 people.

GE will ship the nacelles to the wind farms now springing up across the US. “The IRA is providing a more clear pathway towards onshore wind growth over the next decade,” Strazik says. GE is also considering a plant in New York state to make the giant blades used in offshore wind — a sector that barely exists in the US.“The IRA really underpinned the business case to stay here,” adds Jorg Heinemann, chief executive of EnerVenue, a US battery company building a $264mn factory in Kentucky. “Take away the IRA, now it becomes a much more difficult equation . . . the pull of Asia would have been difficult to resist.”Indeed, Asian companies are now in the vanguard of investors coming to the US, with South Korean giants such as Hyundai, LG, SK and Samsung pledging tens of billions of dollars to make battery plants. Hyundai is also building a $5.5bn electric vehicle factory near Savannah, Georgia, one of the largest EV investments to date. Despite the Biden administration’s confidence that its strategy will pay off both politically and economically, there are some warning signs that it could be a disappointment. Manufacturing employment boomed by just under 800,000 jobs since Biden took office, hitting a post-pandemic high close to 13mn last month and eclipsing the levels recorded under both Trump and Obama. But the sector’s job growth has slowed sharply this year and the ISM manufacturing index fell unexpectedly to its lowest level in three years last month, suggesting some significant cyclical headwinds are building, as the Federal Reserve presses ahead with higher interest rates to fight inflation. “We have to stick the landing and prove that we can do this in ways that are resilient to inflation questions and to recession questions that are all still in the mix here. And that’s not straightforward,” says Harris. “I’m optimistic but I’m not going to say these are calm waters.” In fact, the biggest fear when it comes to the Biden administration’s strategy to rebuild American industrial strength is that it could fail to ultimately deliver the transformation promised on the ground in places like Buffalo. “Manufacturing is always going to be critically important to GDP, but it’s not going to be where the big numbers are for employment,” says Edelberg, pointing to long-term productivity trends and the continued dominance of the service sector in the US economy. Employees at Buffalo’s rejuvenated Viridi factory — the kind of project that the White House wants to see sprout across the US, especially in the industrial areas that were ravaged during the globalisation era © Lindsay DeDario/FTIn Buffalo, the Viridi battery plant now stands as a beacon of opportunity in a depressed area. But its workforce is a fraction of the thousands that once worked in the plant shut down by American Axle & Manufacturing 15 years ago. Automation is coming fast too, and robots won’t revive the area — or vote in elections.James Giles, a Christian pastor on the East Side and social justice advocate who is head of personnel for Viridi, is sceptical that tax breaks, subsidies and loans from Washington can deliver the change needed in communities like the East Side.“They’ve literally dumped billions and billions into urban communities across this country,” he says, referring to earlier federal rejuvenation efforts. Even so, the push to support US domestic manufacturing is almost certainly here to stay. While some Republicans have called for a reversal of Biden’s subsidies should they win back the White House and full control of Congress next year, it could be a very hard case to make. “I don’t see a lot of politicians walking into a community and saying, ‘I know we like that battery factory where you’ve all got jobs but I’m going to take away the subsidies and send those jobs overseas’,” says Boushey. “That’s not a message that resonates with anyone.” More

Deutsche Post DHL is investing €500mn in its Latin American business as it seeks to capitalise on growing demand to expand supply chains beyond China.The logistics group is building out new warehouses across alternative manufacturing hubs such as Mexico, Malaysia and Vietnam as businesses try to diversify their sourcing.Oscar de Bok, head of DHL’s supply chain business, said storage facilities in these countries were filling up almost as soon as they opened. “Every time we think that we are taking a bigger risk, we fill it up right away,” he said.He added that businesses were not shutting down operations in China, but “instead of making the next investment of growth in China, [they are doing] that in alternative markets”.His comments come as multinationals race to secure their supply chains and reduce their dependence on the world’s largest exporter, following disruptions during China’s draconian Covid-19 lockdowns and rising concerns over geopolitical tensions between Beijing and the west. But De Bok echoed warnings that after decades of infrastructure investment in China, smaller manufacturing hubs have only limited supplies of land and labour to meet demand.“Will the sum of Vietnam, Mexico, Malaysia [and] India be competitive with what China can offer? . . . Will there be a challenge in some cases? Probably,” he said.He added that the Malaysian island of Penang, a hotspot for tech manufacturing, was running short of space, with new factories now spreading to the mainland.DHL was also “fast seeing a scarcity of available people” across Malaysia and Mexico, he said. The group had secured an agreement with the Malaysian government that allowed it to bring in more foreign staff,” he added, “in return for offering facilities for workers that went beyond the minimum standards required. Executives helping western multinationals to reorganise their global supply chains echo his views. One Singapore-based supply chain consultant said they had helped a number of clients move factories from China to Mexico, boost manufacturing in Malaysia and increase semiconductor production in the US. “[But some of these countries] are literally running out of talent,” the person said.Over the past year, big plans announced by DHL have included a €500mn investment in India, involving 12mn sq ft of warehouse developments between 2022 and 2026. The group will also lay out plans this week to invest the same amount across Latin America, as it foresees particularly high demand in Mexico from the automotive sector.DHL’s investment plans follow a period of record earnings as consumers splurged on online shopping deliveries during Covid-19 lockdowns. But the group also faces competition from others who cashed in on the ecommerce boom, with the likes of Danish shipping group AP Møller-Maersk similarly hoovering up warehouses across Asia. As DHL seeks to set itself apart from its rivals, De Bok said the company was investing in technology such as robots that could also help make up for labour shortages. He said he saw “lots of opportunities” in artificial intelligence, which could help the group optimise its transport routes in response to disruptions.“Supply chains are now far better understood as being essential in everyday life. That means there’s way more investments going into supply chains,” he said. “It’s now an industry where you need to move really fast [and] be innovative.” More

SINGAPORE (Reuters) – The dollar sank to a two-month low against its major peers on Wednesday in the lead-up to a key U.S. inflation reading, while sterling scaled a 15-month top on expectations the Bank of England (BoE) has further to go in raising rates.U.S. inflation data is due later on Wednesday, with expectations core consumer prices rose 5% on an annual basis in June. The figures should also provide further clarity on the Federal Reserve’s progress in its fight against inflation.Ahead of the release, the U.S. dollar fell to a two-month low of 101.45 against a basket of currencies, extending its losses from the start of the week after Fed officials said the central bank was nearing the end of its current monetary policy tightening cycle.The euro rose 0.07% to $1.1018, flirting near Tuesday’s two-month high of $1.1027.”We’re already seeing markets move in anticipation of a softer U.S. inflation report,” said Matt Simpson, senior market analyst at City Index. “That runs the risk of a ‘buy the rumour, sell the fact’ reaction if the figures come in around expectations.”Elsewhere, sterling peaked at a 15-month high of $1.2940 in early Asia trade, bolstered by bets the BoE will have to tighten monetary policy further to tame British inflation that is running at the highest rate of any major economy.Data out on Tuesday showed that a key measure of British wages rose at the joint fastest pace on record as basic earnings in the three months to May surged 7.3%, higher than expectations of a 7.1% rise.”The (BoE) will have their heads in their hands following the latest employment and wages figures, as it likely forces them to hike by another 50 basis points (bps) at their next meeting and have a terminal rate above 6%,” Simpson said.Current market pricing indicates roughly another 140 bps of rate hikes from the BoE.The Japanese yen strengthened past the 140 per dollar level on Wednesday to peak at a one-month high of 139.54 per dollar, drawing some support from expectations that the Bank of Japan (BOJ) could tweak its controversial yield curve control (YCC) policy at its upcoming meeting this month.”Although steady policy appears to be the most likely outcome for the July policy meeting, it is widely expected to bring upgraded inflation forecasts and the market will continue to hope that the BOJ may offer some signal as to when YCC could be adjusted,” said Jane Foley, head of FX strategy at Rabobank.”Speculation of a possible tweak could allow the (yen) some support ahead of the BOJ meeting this month.”In other currencies, the New Zealand dollar rose 0.34% to $0.6219 ahead of a monetary policy decision from the Reserve Bank of New Zealand (RBNZ) later on Wednesday, though expectations are for the central bank to keep rates on hold.”While we continue to see the balance of risks tilted toward the RBNZ eventually having to do more, that’s not expected to happen today,” said Susan Kilsby, an agricultural economist at ANZ.The Aussie gained 0.39% to $0.6713. More

SYDNEY (Reuters) -Australian No. 4 home lender ANZ Group broke with its rivals on Wednesday and said it supported regulator-recommended mortgage buffers to measure a customer’s borrowing capacity, citing uncertainty around the direction of interest rates.Under an Australian Prudential Regulation Authority (APRA) guideline, the country’s main lenders must test whether a borrower could make repayments if interest rates were 3% higher before selling them a loan.But the country’s central bank has raised rates 4% since May 2022 to slow inflation, leaving thousands of home owners unable to refinance their loans under the guideline. ANZ’s three larger rivals have started considering lending without applying the 3% buffer, saying it is disadvantaging some borrowers. “Of course we should build in buffers,” ANZ CEO Shayne Elliott told parliament in a regular hearing the country’s main bank bosses are required to attend.”I think 3% feels about right. We don’t know what the future holds,” he added.Few people predicted the size and speed of rate hikes so far in 2022 and 2023, and “economists think there might be another 50 basis points or more”, he said.”It’s completely unknown. We’re very comfortable with the 3%.”Elliott said that while ANZ had noticed a slowdown in discretionary spending – including for health club memberships, streaming services and dining out – its call centres had recorded only a modest increase in borrowers struggling to make repayments.Just A$6 of every A$1,000 ($670) owed to ANZ for a mortgage repayment was more than 90 days late, which was “better than it was before the pandemic”, Elliott said.”Good incomes mean that people absorb bigger expenses,” he added. Also, household savings remained higher than before COVID-19 and lending standards had improved.Even first home buyers who bought soon before the rate hikes, the category most exposed to higher repayments, “are performing remarkably well”, Elliott said.People coming off low fixed-rate mortgages, facing far higher variable rates, were “less stressed than the average customer,” he added. “They’re prepared for it. They know it’s coming, it’s not a surprise.”($1 = 1.4939 Australian dollars) More

Swing pricing involves adjusting a fund’s value in line with trading activity so that redeeming investors bear the costs of exiting a fund and do not dilute remaining investors.The U.S. Securities and Exchange Commission intends to impose other fees that will affect parts of the $5.5 trillion industry, the report said, citing person familiar with the matter.The five-member commission will vote on a 2021 proposal to boost the resiliency of money market funds, which required a taxpayer bailout at the start of the coronavirus pandemic. It had initially proposed imposing a swing pricing rule to discourage hasty withdrawals in times of stress, but the proposal drew strong industry objections.Asset managers argued it would be operationally challenging, impose excessive costs on fund sponsors, and reduce daily liquidity for investors, potentially killing off some popular products. More

(Reuters) – A U.S. judge on Tuesday dismissed a lawsuit in which the founder of WallStreetBets, which helped ignite investors’ fascination with “meme” stocks, accused Reddit of wrongly banning him from moderating the community and usurping his trademark rights.Jaime Rogozinski, who founded WallStreetBets in 2012, said Reddit ousted him in April 2020 as a pretext to keep him from controlling a “a famous brand that helped Reddit rise to a $10 billion valuation” by late 2021.Rogozinski had applied to trademark “WallStreetBets” in March 2020, when the community reached 1 million subscribers. It now has 14 million.In a 15-page decision, U.S. District Judge Maxine Chesney in San Francisco rejected Rogozinski’s claim that he owns the WallStreetBets trademark because the market associated it with him and he made the brand famous.She also dismissed Rogozinski’s state law claims related to his ouster, saying either that they were preempted by a federal law that provides “broad immunity” to websites publishing mainly outside content, or that he lacked standing to sue.Chesney said Rogozinski can try to amend his complaint.”While we are disappointed with today’s ruling, Mr. Rogozinski remains confident and committed to vindicating his rights,” his lawyer James Lawrence said in an email.Reddit declined to comment.It has called Rogozinski’s lawsuit a “transparent attempt to enrich himself,” and said it got involved to prevent consumer confusion, preserve goodwill, and let people in the r/WallStreetBets subreddit decide who should guide it.Rogozinski was seeking at least $1 million in damages.Meme stocks gain popularity through discussions, often among inexperienced investors, in online forums including Twitter.Their popularity often leads to volatile stock prices that do not reflect companies’ fundamentals or financial health.Prominent meme stocks have included AMC Entertainment (NYSE:AMC) Holdings, GameStop (NYSE:GME), Koss and the now-bankrupt Bed Bath & Beyond (OTC:BBBYQ). The case is Rogozinski v Reddit Inc, U.S. District Court, Northern District of California, No. 23-00686. More

LONDON (Reuters) – Companies around the globe took on a record $456 billion of net new debt in 2022/23, although higher interest rates should reduce appetite for new borrowing ahead, Janus Henderson said in a report published on Wednesday.The net new debt taken on in 2022/23 pushed outstanding net debt up by 6.2% on a constant-currency basis to $7.80 trillion, surpassing a previous peak in 2020/21, at the height of the COVID pandemic, Janus Henderson’s annual corporate debt index showed.The index, which monitors 933 large listed non-financial corporates globally, showed that U.S. telecoms group Verizon (NYSE:VZ) became the most indebted firm in 2022/23 for the first time, while Google owner Alphabet (NASDAQ:GOOGL) remained the most cash-rich company.One fifth of the net-debt increase reflected companies such as Alphabet and Meta, which owns Facebook (NASDAQ:META) and Instagram, spending some of their “vast cash mountains”, Janus Henderson said.This suggested the rise in debt was “not as worrying,” said James Briggs, fixed-income portfolio manager at the firm, which has $310.5 billion in assets under management.The report noted that the increase in total debt was more contained at 3% on a constant-currency basis.While corporate credit quality has held up well so far, it was likely to decline going forward, the report added. Briggs said the pace of decline would depend on strength in labour markets and the services sector.Higher interest rates were also expected to dampen appetite for further corporate borrowing and Janus Henderson said it expected net debt to decline by 1.9% in 2023/2024, falling to $7.65 trillion on a constant-currency basis.The time lag for interest rate increases to filter through also meant that companies were yet to feel a significant impact on their cost of borrowing, the report said.U.S. firms, that largely rely on fixed-rate bonds as a source of financing, have been particularly shielded so far, with the collective interest bill being flat year-on-year, it added.In Europe, where a larger part of financing comes from banks, firms have started feeling the pinch from the fastest tightening cycle in a decade and the amount spent on finance costs rose by a sixth at constant exchange rates.”The increase in interest rates will feed through into the weaker cohort of credit quality much quicker than in investment grade (bonds),” Briggs said. “We’re also expecting more distress in private markets and leveraged loans compared to high yield.” More

The writer is the publisher of Japan Economy Watch and author of the forthcoming book ‘The Contest for Japan’s Economic Future’The yen has weakened so much that, once again, Japan’s ministry of finance is threatening to intervene in currency markets to shore up its value. If it does so, it is bound to fail, just as it failed last year despite spending a stupendous ¥9.19tn, almost 2 per cent of gross domestic product.Intervention only works when a currency is out of line with economic fundamentals, but that is not the case today. The yen is so weak — worth 25 per cent less than two years ago — because Japan’s exporters have lost their past competitiveness. In fact, if current trends continue, Japan may be overtaken by Korea in the real (price-adjusted) volume of exports.A few decades back, Japan’s consumer electronics, industrial machinery and automobiles were so clearly superior that its exporters could command high prices and still enjoy a high share of global exports. Today, however, these companies have shed much of their lustre. To sell their products, they must lower their prices, which requires a weaker yen.In fact, the “real effective yen” is the weakest it has been in a half-century, according to the Bank of Japan. That measure takes into account the difference in price trends between Japan and all its trading partners. As a result, the real effective yen indicates how the prices of Japanese products in foreign markets compare with those of competitors.Over the past two years, the main factor in the yen’s value has been the gap between 10-year government bond rates in the US and Japan. When Treasuries pay much more than Japanese government bonds, investors sell the latter and therefore the yen itself, in order to buy dollars as they purchase US debt. That selling pressure lowers the value of the yen. In fact, since July 2021, there has been a stunningly high 97 per cent correlation between daily ups and downs in the rate gap and daily moves in the yen-dollar rate. The MoF intervention last autumn could not alter this linkage, nor would it today. At present, the interest rate gap is fluctuating around 3.5 per cent and a yen that recently weakened to ¥145 a dollar is in line with that gap.

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If the interest rate gap were the sole cause of the weak yen, then a rise in Japanese bond rates and a fall in US rates could cure the problem. In reality, the yen is not likely to return to levels deemed normal a decade or two ago. On the contrary, an interest rate gap that yielded a ¥100 per dollar exchange rate back in the early 2000s now translates into around ¥120 per dollar.The reason is that, even with a cheap yen, Japanese companies have trouble competing with exports. For the 30 years to 2010, whether the yen was strong or weak, Japan ran trade surpluses every year but one. Since 2011, however, the country has suffered trade deficits in nine of the past 12 years, even though the real effective yen during the last decade was 25 per cent cheaper than it was during 1980-2010. While in the short-term, income from Japan’s foreign investments acts as a counter to weakness, the longer-term direction of the yen must reflect the trade weakness. Japan’s share of price-adjusted exports by rich countries peaked at 8 per cent back in 1985. Over the succeeding decades, the share steadily dropped to just 5.8 per cent, despite the steady weakening of the yen. By contrast, both the US and Germany maintained their share.In 2000, Japan’s electronics companies enjoyed a trade surplus equal to a hefty 1.3 per cent of gross domestic product; now the sector regularly runs trade deficits. In autos, Japan will soon be overtaken by China as the world’s top exporter, partly because Japanese companies lag in battery-powered electric vehicles.The auto case brings up another reason a weak yen has not helped Japan’s exports as much as policymakers had hoped. Japan’s carmakers make more than 80 per cent of their overseas sales by producing overseas rather than exporting from Japan. The same pattern is seen in electronics, machinery and other products. The more Japanese companies move their production overseas, the smaller the boost to exports for any given drop in the value of the yen.One final point: a weak yen means Japanese households and producers have to pay more for foodstuffs and energy. And it leaves consumers with less money to buy products made in the country. As a result, real (price-adjusted) household spending in 2023 is no higher than it was way back in 2012. The weak yen doesn’t just reflect economic weakness; it also makes a weak economy even shakier. More