Strong Yen Threatens Japan’s ‘Galapagos Effect’

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By William Pesek

Billionaire Masayoshi Son has a stark message for Japan's policy makers: I'm through waiting for you gents to revive the economy.

That's the upshot of the move by Softbank Corp. -- where Son is chairman and chief executive officer -- to buy a 70 percent stake in Sprint Nextel Corp. for $20 billion. Investors are obsessing over whether it's a good bet by the wireless carrier. Foreigners don't tend to make much money on forays into U.S. phone companies. But we're missing the bigger point: Japan's second-richest man is turning at least part of his back on his aging and shrinking population and his face toward overseas markets that offer growth opportunities.

The issue here is the strong yen. Japan failed once again last week to convince the Group of Seven nations that an overvalued currency is gutting its economy. Koriki Jojima was recently named Japan's fifth finance minister in three years and, like the others, sees a weaker yen as job No. 1. That's not going to happen when the dollar and the euro face worse fundamentals than the yen.

The head-in-the-sand dynamic pervading the Ministry of Finance leaves Son no choice but to venture abroad. The firm yen has its benefits, making overseas acquisitions more affordable than ever for cash-rich Japanese companies. Fast Retailing Co., Kirin Holdings Co., Lawson Inc. and Rakuten Inc. are turning to faster-growing markets amid deflation and ugly demographics at home. Yet Son's move grabbed the most headlines.

Son is a gambler who bet well earlier on Alibaba Group Holding Ltd. and Yahoo Japan Corp. Whether Sprint will be a repeat performer is anyone's guess. Yet here's one additional plus that comes from this latest wager: addressing the "Galapagos syndrome'' that undermines Japan Inc.

Japan's mobile-phone producers are the market equivalent of the endemic species that Charles Darwin found on the remote islands off Ecuador's coast. Their products are highly evolved and distinct from anything found elsewhere, but not particularly suited to thriving beyond the water's edge.

Son's Sprint deal will test that phenomenon at the perfect moment. It also challenges the dogma that a strong yen is always bad for Japan.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)

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-0- Oct/15/2012 15:30 GMT