Counterparties: Yen and the art of business cycle maintenance
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Itâ€™s been five days since the Bank of Japan announced an â€śunprecedented degree of monetary easingâ€ť and the early verdict is positive: the Yen has fallen to aÂ three-year low and Japanâ€™s Nikkei stock index has hit aÂ near five-year high. This monetary expansion, along with a huge fiscal stimulus, has made Japan the â€śmost interesting story in global economics right now,â€ť according toÂ Neil Irwin.
The BOJâ€™s new policy aims squarely at hitting a 2% inflation target â€śat the earliest possible timeâ€ť, and aims to double Japanâ€™s monetary base. A bit of context, from UBS analyst Syed Mansoor Mohi-uddin: the BOJâ€™s asset purchasing program will be nearly large as the Federal Reserveâ€™s, in an economy less than half the size of Americaâ€™s.
Holders of Japanese equities are clear beneficiaries of this policy. Major exporters also stand to gain:Â Toyota could make $1,500 more per car thanks to improved profits on exports, according to Morgan Stanley estimates. Other winners from the BOJâ€™s easing are bit less obvious:Â 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 Japanâ€™s newfound monetary aggressiveness are its East Asian neighbors.Â Chinese economists have labelled the new measures â€śmonetary blackmailâ€ť and a stimulus that â€ścould spell doom for other nations in the region.â€ť Last month,Â South Koreaâ€™s finance minister called the yen a â€śflashing a red lightâ€ť for his countryâ€™s exports. Despite their fears, Citibankâ€™s Steven Englander says that the Bank of Japanâ€™s moves, endorsed by the Fed and the IMF, are â€śvery G7 compliant,â€ť providing the central bank with political cover. Moreover, says Menzie Chinn, a boost in Japanâ€™s economic output will also have positive spillovers on Chinese and Korean economic growth. That should mitigate the impact of lost export competitiveness.
George SorosÂ provides the contrarian view. The BOJâ€™s policy could prove to be â€śactually quite dangerousâ€ť 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.â€ť In that case, the benign fall in the yen â€śmay become like an avalanche.â€ť – Peter Rudegeair
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