As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled. As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.
In Japan, economic and business conditions remain as dull as ever, but politics and monetary policy are suddenly exciting. And while the world has largely lost interest in Japan, the gestalt shift in the world’s third-largest economy could have big implications for global business and for the way voters think about governments and central banks.
Last weekend’s landslide election of Shinzo Abe, a potentially powerful prime minister, was largely a result of his promise of a revolution in monetary policy designed to jolt the Japanese economy out of its 20-year stupor. If Abe delivers on his election rhetoric – still a big “if”, especially in a country where power is wielded mainly by bureaucrats rather than elected politicians – the global impact could be huge.
At a practical level, Abe has promised to force the Bank of Japan to print money and weaken the yen until Japan’s inflation rate accelerates to 2 percent and growth is restored. If he acts on this promise, the effect will be to strengthen the dollar, not only against the yen but also against the euro and other major currencies. If the yen weakens substantially, high-end exporters in Germany and the rest of Europe will stop gaining market share from Japanese rivals to offset their loss of competitiveness in the U.S. market. The same will be true for Korean and Chinese exporters, which have been crushing Japanese competitors hobbled by the strong yen.
Less obvious, but even more important, could be Japan’s impact on the global debate about macroeconomic management. The era when monetary policy was simply about controlling inflation is over. The consensus on macroeconomics created by the Reagan-Thatcher political revolution and the near-simultaneous monetarist revolution in economic thinking has broken down.