Comment: Japan signs up to ‘whatever it takes’ club

Japan's Nikkei 225 index in Tokyo leaps as a fall in the yen enticed investors back into shares last week. Picture: AP
Japan's Nikkei 225 index in Tokyo leaps as a fall in the yen enticed investors back into shares last week. Picture: AP
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IT SEEMS Japan is no longer the land of the lost decades. In a sweeping monetary easing programme announced last week, the country’s central bank has joined America and Europe in the “whatever it takes” club. And it has joined in spectacular fashion.

The announcement by Bank of Japan chief Haruhiko Kuroda of a massive quantitative easing programme is designed to jump-start the country’s ailing economy and brings to an end years of ineffective fiddling.

The Nikkei 225 jumped by two per cent on the news, having soared four per cent at one point. The yen tumbled against the dollar.

But the central bank’s bold actions are not without risk. The concern is that, by embarking on policies to drive down the value of the Japanese currency to stimulate exports, the country has intensified global pressure for other countries to do likewise for their ailing economies, thus triggering a global “beggar thy neighbour” currency war. The news is unlikely to have gone down well with Japan’s trading competitors in the Asia Pacific region.

The immediate reaction, however, has been overwhelmingly positive. After years of frustration and disappointment, investors are convinced that this time Japan really means business and that it is determined to jump-start the economy into a new era of growth. There is an evident determination to leave behind the era of falling prices which discouraged business investment and gave domestic consumers no reason to step up their household spending. Why rush to buy when prices were likely to be lower in a year’s time?

Japan’s economy became trapped in a gentle but persistent deflation which no amount of government “stimulus packages” seemed able to shift. There were dozens of them, designed to kick start growth. But the economy barely stirred.

So what exactly has the central bank done? First, it has announced it will double the amount of bonds it will buy each month to seven trillion yen (£50 billion). This was bigger than the market expected and so Japan leaps to the front row of the QE club. Over 2013 as a whole, the stimulus is reckoned at 50 trillion yen (£350bn), the equivalent of almost 10 per cent of Japan’s gross domestic product, or total economic output.

It is also broadening the range of bonds being bought to include longer-dated government stock. This should work to drive long-term interest rates lower. And it is stepping out to buy riskier assets such as equities in the form of exchange traded funds and real estate investment trusts.

Little wonder the Tokyo market jumped to its highest level in almost five years. The central bank has also made clear that it will continue with these policies for as long as it is considered necessary for reaching the two per cent inflation target.

The step was much bigger than expected and signalled a more aggressive approach towards driving growth.

And far from being an isolated action, it follows major announcements by Japan’s prime minister Shinzo Abe to step up government spending and encourage inflation to rise to two per cent. Indeed, his efforts have already been branded “Abeconomics”, though there is very little to distinguish between what Japan’s central bank has just announced and the monetary expansion plan that has been pursued over the past three years by US Federal Reserve chairman Ben Bernanke.

Says Guy Foster, market strategist at Brewin Dolphin, “What is clear is that this is a concerted effort which is being eloquently stage-managed for maximum effect.

“We also understand that there is a tremendous sense of support for such radical policy actions from the ministry of finance, Bank of Japan, and the Japanese private sector. Desperate times, it seems, call for desperate measures.”

All very bold. But will it work? Sceptics point to the sluggish response in America to the Fed’s monetary easing programme. While its economy is showing considerably more life than the UK, the recovery is anaemic by historical standards. Markets on Friday registered disappointment that the US economy added just 88,000 new jobs in March, the lowest level for nine months. The number was much lower than the approximately 200,000 new jobs predicted by economists, and will raise new concerns about the strength of the US economic recovery.

The culture and structure of Japan’s economy is also less flexible and more resistant to change. It is one thing for the central bank to pump in money; it is another for an economic structure as rigid as Japan’s to respond in textbook manner to such stimulus. The result may be not economic recovery but an asset price bubble – the cause of Japan’s spectacular bust in 1989.

There is certainly no lack of “stale bulls” in global markets who have clung to Japanese investments for years, only to be repeatedly disappointed. The reaction of Cantor Fitzgerald was certainly more watchful. “After many years of interfering in its own bond markets in the fight against deflation,” it commented, “the monetary junkies of Japan appear to have decided that it was not a case of the medicine not working in its failure to lift the economy out of stagnation but simply that they were not using a sufficiently large syringe.”

“As with the other proponents of monetary expansionism, it should not be forgotten that most of these states are in effect cash-strapped (if not bankrupt), and that cranking up the monetary printing presses, remains a somewhat unproven methodology to ensure a return to growth”.

Martin Schulz of the Fujitsu Research Institute is more positive. “The big story, and the lasting story”, he says, “will be the exporters. A weaker yen helps the exporters to earn money with Japanese technology in Asian markets in particular.”

But a big pick-up in exports flowing from the weaker yen is not assured. Previous attempts at aggressive structural reform resulted in a sharp fall in the currency. Yet the weakening yen did not provide a sustainable boost to the country’s exporters.

Nor do recent figures provide much comfort. According to latest data, Japanese exports fell by 16 per cent month on month in February, indicating that the weak yen has yet to help companies to sell more products abroad.

However, the yen’s fall in the past week has been marked – down by 4.5 per cent against the US dollar and more than five per cent against the euro. Further weakness is thought likely.

A return to robust growth by Japan would boost the global recovery story and provide encouragement for struggling economies elsewhere. But a more considered reaction beyond this weekend is likely to focus on previous Japan disappointments, and concern that it may have widened the door to competitive currency devaluation elsewhere.

Twitter: @Bill_Jamieson