Counterparties: Yen and the art of business cycle maintenance
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It’s been five days since the Bank of Japan announced an “unprecedented degree of monetary easing” and the early verdict is positive: the Yen has fallen to a three-year low and Japan’s Nikkei stock index has hit a near five-year high. This monetary expansion, along with a huge fiscal stimulus, has made Japan the “most interesting story in global economics right now,” according to Neil Irwin.
The BOJ’s new policy aims squarely at hitting a 2% inflation target “at the earliest possible time”, and aims to double Japan’s monetary base. A bit of context, from UBS analyst Syed Mansoor Mohi-uddin: the BOJ’s asset purchasing program will be nearly large as the Federal Reserve’s, in an economy less than half the size of America’s.
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’s 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’s newfound monetary aggressiveness are its East Asian neighbors. Chinese economists have labelled the new measures “monetary blackmail” and a stimulus that “could spell doom for other nations in the region.” Last month, South Korea’s finance minister called the yen a “flashing a red light” for his country’s exports. Despite their fears, Citibank’s Steven Englander says that the Bank of Japan’s moves, endorsed by the Fed and the IMF, are “very G7 compliant,” providing the central bank with political cover. Moreover, says Menzie Chinn, a boost in Japan’s 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’s policy could prove to be “actually quite dangerous” 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.” In that case, the benign fall in the yen “may become like an avalanche.” – Peter Rudegeair
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