Japan taking big gamble with QE program
Responding to a decade of depressed consumer demand, Haruhiko Kuroda, governor of the Bank of Japan, announced this spring a program of quantitative easing of about $1.4 trillion by 2014 to boost the island nation's economy.
The amount followed — and even exceeded — the relative size of Ben Bernanke's prior QE for the U.S. economy.
The Japanese Yen, along with the euro, is a secondary international reserve currency held by major investors — including central banks — as a form of risk diversification away from dollars. There is little doubt that if Kuroda's gamble fails, it will have major international repercussions, possibly heralding a global currency crisis.
Recent volatility in Japanese financial markets indicates growing concern.
Japan emerged from Word War II economically broken. Like Germany, Japan received reconstruction aid from the Allied powers. Armed with a high, Germanic work ethic and preparedness to embrace modern technology, Japan's economy became second only to that of the United States.
Unlike Germany, however, Japan's politicians shared with the Allied powers a Keynesian belief in public debt. As a result, Japan enjoyed phenomenal economic success in the 1960s and early 1970s. That burst in the early 1990s, leading to a decade of economic stagnation, strangely similar to that which infected the United States and European economies about a decade later.
Japan used QE programs, taking its debt-to-gross domestic product ratio to a staggering 214 percent, far higher than any other developed nation. Because Japan generated continuous trade surpluses, no one complained. However, trade deficits forecast for this year have led to calls for dramatic action.
In 2010, China pushed Japan's $5.5 trillion economy into third place. Excluding the European Union as a single economy, Japan's shrunken economy at $5.1 trillion is still the world's third largest, but only about a third of the $16.2 trillion U.S. economy.
Kuroda's open-ended $1.4 trillion cash infusion was equivalent to a U.S. Federal Reserve QE of about $4.5 trillion. In other words, it was huge. Meanwhile, the yen has continued its steady, 30-percent fall since September, leading to hopes of increased exports. Japan's Nikkei 225 Index broke even at a five-year high of 13,000 on April 5th.
Since no QE has succeeded in recent years, the ramifications of a failure will be far-reaching for the credibility of international fiat currency. Kuroda's stated aim is to generate 2 percent inflation. With that outlook, combined with current yields of less than one percent and forecast deficits, many traditional domestic buyers of Japanese government debt have diversified into foreign bonds. This has driven the yen down further and the Japanese 10-year bond yield upwards three fold to 1.0 percent.
Kuroda's QE now is generating concern within Japan. Hopefully, such fear will not spread to the QE programs of the U.S. or EU.
Regardless, investors should keep their eyes on the progress of Japan's great gamble.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Attorney: Ferguson grand jury has reached decision
- U.S. Steel to relocate corporate headquarters on former Civic Arena site
- Clues to Chief Justice John Roberts’ thinking on new ObamaCare case
- High winds knock out power, injure man at Cranberry construction site
- Two judges with Pittsburgh ties announce candidacies for Pa. Supreme Court
- New Kensington-Arnold employee suspended over alleged inappropriate contact with student
- Pennsylvania human services agency gets new name
- Allegheny County will stop asking about employees’ criminal history, executive says
- 4 injured when vehicles collide, car plows into North Huntingdon auto body shop
- Finding balance between toughness, excessiveness key for Penguins’ Downie
- Starkey: No explaining Steelers, AFC North