Japan's easing threatens to put neighbours in real difficulty
Japan's new government has curiously been put on the defensive for attempting to reflate an inert economy. People talk of Japan's lost decade but the dip has lasted a generation, dating from the asset crash of the late 1980s. Now Prime Minister Shinzo Abe's cash-pumping to weaken the yen and raise exports has been likened by European and some Asian central bankers to the beggar-thy-neighbour currency mania of the 1930s. It is conceded that inflationary contagion across borders is real as the Bank of Japan's (BOJ's) policy reversal on inflation toleration - from 1per cent to 2 per cent, at Abe's urging - can be a shock to the system.
An expansionist monetary stance can misfire, but give him credit for daring to challenge orthodoxy after fiscal and pump-priming fixes have failed. Supplementary budgets barely moved growth and consumption, and structural reforms going back to Junichiro Koizumi's time had been piecemeal.
Those who worry that the BOJ move could ignite retaliatory devaluations often cite how China's decision not to devalue its spiking yuan during the 1998 Asian financial debacle helped Asia to recover. Had China acted intuitively to ensure its exports were not adversely affected by competition from nations whose currencies were down sharply, the domino effect would have kept crashing economies submerged. Hence, Japan should not be dismissive of concerns expressed by trade rivals. Economies are intertwined.
Japan had its worst trade deficit last year, with exports down 6 per cent while imports shot up. An inflationary prod would look well-timed. But in turning up cash volumes when spending and investment are weak across the developed world, there is a risk of surplus money chasing unproductive asset classes. Property is a favourite, with open economies like Singapore and Hong Kong especially vulnerable.
The BOJ has moved to join other major central banks in their money-printing sprees. The BOJ will pump out cash until deflation is defeated. America's Federal Reserve is not done yet with quantitative easing, waiting for job numbers to improve. The European Central Bank's projected bond-buying in the Mediterranean belt is intended to ease the euro zone's debt jitters. With the troika committed and the Bank of England likewise lining up to pump up the British economy, there is cause for concern when this creates instability, with even experts at odds over important causes and effects.
Japan's monetary easing, which is not all that new, would work better if reforms to labour practices and trade barriers, and the activation of enormous domestic savings were undertaken in tandem.