The fall of the yen as seen from Hawaii

It was a desperate effort by Tokyo to preserve its oil lifeline and imperial ambitions in the face of the American oil embargo that led to the bombing of Pearl Harbor in Honolulu, Hawaii in December 1941.

Now, Hawaii appears about to become again a victim of collateral damage, this time from the fall of the yen in the wake of Tokyo’s new desperate effort to jump start the Japanese economy with massive monetary easing, stimulus, and hoped for inflation.

The efforts of the new Tokyo regime of Prime Minister Shinzo Abe to have the Bank of Japan engage in so called quantitative easing by buying assets onto the BOJ balance sheet have already resulted in more than a 20 percent decline of the yen against the dollar. This has resulted in outcries of pain from Seoul, Taipei, and the capitals of other countries that compete with Japan in global export markets. Indeed, the head of General Motors in South Korea publically called on the Korean government to take counter measures to prevent the won from becoming too strong with regard to the yen. If it did not do so, he warned, Korea’s export dependent economy could suffer severe damage.

Nevertheless, the Obama administration has blessed this move by announcing its support of Japan’s efforts to revitalize its economy and by declaring that the BOJ’s quantitative easing does not constitute currency value manipulation which would be contrary to the rules and commitments of the World Trade Organization (WTO) and the International Monetary Fund (IMF). The White House may be judging that a revitalized Japanese economy in the long run is worth some loss of competitiveness on the part of U.S. domestic producers and exporters in the short run. It may also be chary of criticizing another country’s quantitative easing in light of the U.S. Federal Reserve Bank’s own quantitative easing policies even though the Fed’s efforts appear much less aimed at the exchange rate than the BOJ’s.

For Obama, however, the impact of all this on his home state of Hawaii may make the real affect of the new Japanese policies more significant.

By far the largest industry in the state and the one that drives virtually all other economic activity in the islands is tourism or what is locally referred to as the Visitor Industry. With a recovering U.S. economy and strong growth in Asia outside of Japan, the number of visitors to the islands in 2013 is showing growth of about 4.3 percent. Having just arrived myself for a brief visit, I can vouch for the fact that the flights all seem to be full. Yet, Hawaii’s leading economists are predicting that visitor growth in the later part of this year and in 2014 is likely to fall by nearly fifty percent .

Why? According to Hawaii Department of Business, Economic Development, and Tourism Chief Economist Eugene Tam,  the decline in growth will be significantly a result of the depreciation of the Japanese yen . He points out that the falling yen will have a two edged negative affect. First, it will make flights from Japan to the islands more expensive and thereby reduce the number of travelers willing or able to buy a ticket and make the trip. Second, the travelers who do make the trip are likely to spend less because everything will seem more expensive in the light of the devalued yen. This means that the state of Hawaii’s expected GDP and job growth will fall about eight percent from previous expectations.

Thus, Japan’s gain, if there is any, will be partly at Hawaii’s expense. This may be outweighed by longer term gains for the state if Japan actually achieves revitalization of its long dormant economy. But the fear is that because the Abe administration has not suggested the far reaching structural reforms necessary for a genuine Japanese economic renaissance, the exchange rate move will be the major influence. If so, the desired revitalization is likely not to occur with the result of a more or less permanent negative impact on Hawaii and on other economies significantly impacted by Japan.

This makes it imperative for the White House and the international community to make it clear to Tokyo that there must be far reaching structural reform is Japan is to continue to benefit from the forbearance of its global economic partners.