Counterparties: Yen and the art of business cycle maintenance
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It‚Äôs been five days since the Bank of Japan announced an ‚Äúunprecedented degree of monetary easing‚ÄĚ and the early verdict is positive: the Yen has fallen to a¬†three-year low and Japan‚Äôs Nikkei stock index has hit a¬†near five-year high. This monetary expansion, along with a huge fiscal stimulus, has made Japan the ‚Äúmost interesting story in global economics right now,‚ÄĚ according to¬†Neil Irwin.
The BOJ‚Äôs new policy aims squarely at hitting a 2% inflation target ‚Äúat the earliest possible time‚ÄĚ, and aims to double Japan‚Äôs monetary base. A bit of context, from UBS analyst Syed Mansoor Mohi-uddin: the BOJ‚Äôs asset purchasing program will be nearly large as the Federal Reserve‚Äôs, in an economy less than half the size of America‚Äôs.
Holders of Japanese equities are clear beneficiaries of this policy. Major exporters also stand to gain:¬†Toyota could make $1,500 more per car thanks to improved profits on exports, according to Morgan Stanley estimates. Other winners from the BOJ‚Äôs easing are bit less obvious:¬†European sovereigns such as France, Belgium, and the Netherlands are enjoying record low borrowing costs as Japanese investors shift from yen- to euro-denominated assets.
Among the most vocal critics of Japan‚Äôs newfound monetary aggressiveness are its East Asian neighbors.¬†Chinese economists have labelled the new measures ‚Äúmonetary blackmail‚ÄĚ and a stimulus that ‚Äúcould spell doom for other nations in the region.‚ÄĚ Last month,¬†South Korea‚Äôs finance minister called the yen a ‚Äúflashing a red light‚ÄĚ for his country‚Äôs exports. Despite their fears, Citibank‚Äôs Steven Englander says that the Bank of Japan‚Äôs moves, endorsed by the Fed and the IMF, are ‚Äúvery G7 compliant,‚ÄĚ providing the central bank with political cover. Moreover, says Menzie Chinn, a boost in Japan‚Äôs economic output will also have positive spillovers on Chinese and Korean economic growth. That should mitigate the impact of lost export competitiveness.
George Soros¬†provides the contrarian view. The BOJ‚Äôs policy could prove to be ‚Äúactually quite dangerous‚ÄĚ by being too effective at creating inflation, he says: “If what they are doing gets something started, they may not be able to stop it.‚ÄĚ In that case, the benign fall in the yen ‚Äúmay become like an avalanche.‚ÄĚ – Peter Rudegeair
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