Manufacturing Bubble Bursts in Japan

The Wall Street Journal - TOKYO -- Japan has largely escaped the housing bubble and huge credit losses that are weighing on the U.S. and Europe. Then why is Japan's economy shrinking faster?

Economists and corporate executives are realizing that the nation suffers from the bursting of another type of bubble -- one in manufacturing. Between 2002 and 2007, Japan's manufacturing sector boomed, driven by soaring demand for Japanese automobiles and electronic gadgets by consumers globally, including Americans feeling flush amid rising home prices. Fueling the gains was a weak yen that kept Japanese products competitive and propelled yen-based revenue and earnings for companies such as Toyota Motor and Sony to lofty highs.

Many in Japan were relieved to see their economy growing at a healthy pace again thanks to strong exports, after a slump for more than a decade. But many didn't realize just how vulnerable the economy was becoming to consumers abroad, despite decades of hectoring from the U.S. and Europe that Japan needed to rely less on exports and more on domestic demand.

The foreign advice was hard to implement. That's because workers' pay was kept low amid competition from low-cost nations like China, making it tougher for them to spend.http://online.wsj.com/article/SB123293183725014261.html

Dollar's Rise Could Damp Inflation

The Wall Street Journal - The U.S. dollar marched higher again on Friday, continuing a development that could ease inflationary pressures but also could slow a U.S. export boom.

Just a couple of months ago, policy makers were alarmed about how far the dollar had fallen. Now evidence is building that its seven-year slide may be ending.When a currency strengthens, it's usually a sign of health in the underlying economy. In this case, the dollar's rally is a sign of weakness in other economies. Reports in recent days showed that the economies of Japan and Europe contracted in the second quarter, and the U.K. slowed. It's now looking less likely that the rest of the world will be insulated from U.S. economic ills.

The dollar's latest rise is closely tied to recent declines in oil and other commodity prices. As economies in the rest of the world slow, demand for raw materials appears to be waning, which is taking pressure off commodity prices. These goods are typically priced in dollars. As the U.S. currency strengthens, commodity producers have less incentive to increase their prices, further easing the upward pressure on prices. http://online.wsj.com/article/SB121884105817145699.html?mod=hps_us_pageone