A Trip to Hawaii

By Ichiro Suzuki

According to the Nikkei, Japan’s business daily, the iPhone Pro Max (512 gigabytes) costs 45% of average monthly salary in Japan. On its website, Apple lists this phone at 153,780 yen ($1,400). The Nikkei says that an average American spends only 25% of his/ her salary for this device. This cost burden gap roughly represents the difference of per capita income between the the two countries. The IMF estimates per capita GDP of the U.S. at $68,300 as opposed to $42,900 for Japan. A generation ago, Japan boasted of the highest per capita income among the economies of significant size. A generation later, the country has dropped to the 31st place on the IMF rankings (including city states and tax havens). As the country went through years of mild deflation, price hikes were rarely witnessed in the Japanese economy for a very long time. With the economy’s negligent growth, wages and salaries remained stagnant. On top of economic stagnation, the 2010s has turned out to be a decade of yen weakness. The Japanese currency fell for the decade against the U.S. dollar for the first time since the end of WWII. A weaker currency trend pleases exporters, who have always been obsessive about exchange rates. It also makes imported goods expensive to Japanese consumers and industries that rely on imported materials and intermediate goods, beginning with crude oil. Of course, a weak currency brings an immediate adverse effect on per capita income as measured in the U.S. dollar. While the yen’s rise has always been cursed by Corporate Japan, improved terms of trade brought by currency appreciation has contributed to their strength. In fact, potentially adverse effects of crude oil price hikes since the 1970s have been materially mitigated by the rise of the yen that went off a peg against the U.S. dollar in the late summer of 1971. (Higher oil prices also drove the industries to dramatically improved energy efficiency.) Based on the 2010s experience, that the yen may not rise again against the greenback in the same fashion it did in the past could be a dark omen to the Japanese economy. It could be an early warning sign of worsening fundamentals. Despite the mounting public sector debt and an utter lack of ability to grow, the Japanese economy has kept posting current account surpluses at 2-3% of the economy, year after year, underpinning the economy’s external position, which in fact has been stronger than China’s. Current account surpluses have always kept an upward pressure on the yen. However, something might be changing in a subtle fashion. At long last, Japanese consumers are beginning to feel the prices of an economy that has been falling relative to others for years. In the past, crude oil did not hit consumers in the form of materially higher gasoline prices since the yen’s surge always made such a rise milder. With the yen no longer rising, prices hikes of crude oil are now hitting consumers directly. Like the case of the iPhones, decades of wage and salary stagnation is slowly making foreign-produced goods more difficult for them to reach. In the old days, foreign cars used to be utterly beyond reach for an average Japanese man on the street. It was still the time when Toyota was making shoddy cars and Detroit did not shout about their lack of access to the Japanese car market. American, British and German cars were simply too much for incomes levels in Japan at that time. Besides crude oil, there is another thing with which Japanese consumers enjoyed the benefits of the Japanese yen’s greater purchasing power, despite the economy’s stagnation. It is foreign travels. On top of currency effects, short vacations overseas were made vastly cheaper by deregulation. Increased competition drove price tags of vacations to unthinkable levels. Prior to the outbreak of the pandemic, the cheapest trips to Hawaii were sold for as little as 50,000 yen ($450), with round-trip airfare and 3 nights at a hotel. Such an age of ultra cheap trips, however, might have come to an end, due to a changing industry dynamics as well as the currency that no longer rises. On April 1, 1964, six moths before the first Tokyo Olympic, the Japanese government had lifted all restrictions on foreign travels to its citizens, allowing them to travel abroad freely. As soon as restrictions were lifted, a group of the first packaged tour left for Honolulu. The cost of the tour was in the north of 200,000 yen, more than ten times the average college graduate’s monthly salary at that time, when a dollar bought 360 yen at a fixed exchange rate. With such a tour being totally beyond reach for an average Japanese, participants on the tour were essentially small and medium business owners. In October 1963, six months before the lifting of foreign travel restrictions, a quiz show called ‘Up Down Quiz’ on Sunday evening went into the air.As a prize for the winner of the week, the show gave him or her a “dream trip to Hawaii”. The winner was an envy of the country. The popular show lasted until October 1985, a month after G7’s Plaza Accord that created a super normal surge of the yen against the dollar, driving down the price of foreign travels really, really fiercely. Under an macro economic environment of little growth of Japan’s per capita income and a weak currency, foreign travels might be on the verge of becoming expensive to an average Japanese on the street. Should the domestic bond market suffer a heavy blow, as pessimists have been forecasting for years, taking the currency down with it, a trip to Hawaii could once again become a dream. Then, Up Down Quiz might have to be brought back in.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.