The yen has seen a considerable decline in value to the
dollar over the past few months and today it has reached almost 1 yen to 1 cent,
a level not seen for about 4 years. This has many different implications for
Japan and its trading partners.
Japan has been experiencing a strengthening
yen for some time. This makes buying Japanese exports increasingly less
appealing. To paint it in broad strokes, importers need increasing amounts of
currency to exchange money into yen in order to buy those goods so foreign
consumers are less and less likely to consume them.
Accompanying this strengthening of the yen is
deflation. This deflation may also be bad for young workers in Japan as wages
are likely to be sticky downward at first (great for them) but declining or stagnate over
time (not so great for them). People who borrow and spend are also at a disadvantage as
deflation would mean today's yen will be worth more tomorrow in terms of
purchasing power, so you are better off saving for that tomorrow than spending
today. Every economy relies on spending as a component of GDP and Japan is
looking for its citizens to consume more and export more to goose that GDP. Certainly
all this government spending will help with that.
However, deflation may seem great if you are a consumer/importer of foreign products in Japan since your yen buys more and more foreign goods and also good if you are someone on a fixed income like a pensioner as the purchasing power of your savings/pension is increasing.
Using quantitative easing, devaluing the currency in this case by injecting 1trillion USD into the economy through asset buying, is aimed at making the yen worth less in terms of currency exchange by boosting supply and causing inflation. This will make Japanese exports seem cheaper, reigniting the demand for those exports and hence a large portion of the Japanese economy as the Japanese goods will appear to get cheaper in foreign markets. It is also aimed at turning a deflationary trend into an inflationary trend, encouraging people to save less and spend more as prices rise and today's yen is worth more than tomorrow's.
Of course this has a flip side too as foreign goods in Japan will begin to seem more expensive and those on fixed incomes will face inflation and hence a lower purchasing power for their yen, essentially making them seem poorer, but Abe's party and the BOJ have decided those are side effects worth risking and I think they are right. In addition, as the BOJ is borrowing money inflation works to their advantage as today's yen is worth more than tomorrow's. This may put a positive spin on the increased debt, but unlikely as Japan is hugely in debt and we live in a world of austerity and fear of debt.
While the impact of this monetary policy is clear, the long term consequences are not. Whether Japan can continue to carry a huge debt burden while in the process of this, I don't know as that is another story with a myriad of factors unknown.
However, deflation may seem great if you are a consumer/importer of foreign products in Japan since your yen buys more and more foreign goods and also good if you are someone on a fixed income like a pensioner as the purchasing power of your savings/pension is increasing.
Using quantitative easing, devaluing the currency in this case by injecting 1trillion USD into the economy through asset buying, is aimed at making the yen worth less in terms of currency exchange by boosting supply and causing inflation. This will make Japanese exports seem cheaper, reigniting the demand for those exports and hence a large portion of the Japanese economy as the Japanese goods will appear to get cheaper in foreign markets. It is also aimed at turning a deflationary trend into an inflationary trend, encouraging people to save less and spend more as prices rise and today's yen is worth more than tomorrow's.
Of course this has a flip side too as foreign goods in Japan will begin to seem more expensive and those on fixed incomes will face inflation and hence a lower purchasing power for their yen, essentially making them seem poorer, but Abe's party and the BOJ have decided those are side effects worth risking and I think they are right. In addition, as the BOJ is borrowing money inflation works to their advantage as today's yen is worth more than tomorrow's. This may put a positive spin on the increased debt, but unlikely as Japan is hugely in debt and we live in a world of austerity and fear of debt.
While the impact of this monetary policy is clear, the long term consequences are not. Whether Japan can continue to carry a huge debt burden while in the process of this, I don't know as that is another story with a myriad of factors unknown.
