Will the Bank of Japan force a lower yen?
April 9, 2016, 4:54 pm

BOJ Governor Haruhiko Kuroda has said that Japanese growth is tied to China’s economic stability because it is the biggest importer of Japanese commodities [Xinhua]

And so it was on Friday that the yen’s highest level in two years delivered another blow to the Japanese government’s efforts to swing the economy around since it plummeted in the wake of the Fukushima nuclear disaster five years ago.

It was then that Tokyo closed down temporarily all nuclear energy facilities pending a comprehensive safety review. Many have opened since then, but during their inoperation the government was then forced to resort to significantly increasing oil imports to meet its energy demands.

That inevitably led to a trade deficit just as flow of commodities worldwide was beginning to ebb, particularly due to capital outflow from emerging economies.

Enter the BOJ with a quantitative easing package of its own just as the US Federal Reserve was ending its stimulus package.

Like the Fed and the ECB, the BOJ felt the most effective approach was to lower interest rates and weaken the local currency.

That would encourage lending and keep the banks functional but also make Japanese wares and commodities appealing to global markets.

And just like its European counterpart, the BOJ doesn’t seem to have been particularly successful.

The yen just keeps on climbing and inflation rates appear to be receding raising fears of deflation.

Quantitative easing has always been the traditional go-to solution for central banks in times of recession.

It could work provided the state of health of the global economy is stable.

In fact, it did work for the Fed between 2008 and 2014.

However, other economies – chiefly emerging markets – were enjoying unprecedented growth and therefore able to freely import from exporting giants like Japan.

Fast forward two years and the world isn’t only dealing with the Chinese Slowdown (aka correction), but also an oil glut that has forced prices down to 70 per cent from 2014 levels.

Analysts are stumped why the yen continues to gain in value against the US dollar, leaving the BOJ with few options to bounce back the economy [Xinhua]

Japan, one of the world’s biggest exporters of goods, has seen global demand for its wares significantly drop in the past few months as client countries – particularly emerging economies – struggle to deal with devalued currencies and weakening economies.

China’s growth remains key to Japan’s economic growth, in this respect, because it was the largest importer of commodities and goods from key emerging countries.

“There are effects through trade, investment and finance, but trade is the big one, so if China’s economy maintains stable growth our exports should too,” Bank of Japan governor Haruhiko Kuroda recently said.

International Monetary Fund chief Christine Lagarde has repeatedly warned that prospects for emerging market economies have weakened in 2015 relative to the previous year and that for 2016 productivity growth continues to be low.

“Let me be clear: we are on alert, not alarm. There has been a loss of growth momentum,” she said last week, adding that global recovery from the 2007 financial crisis “remains too slow, too fragile and risks to its durability are increasing.”

This new norm of global economic instability has even forced the Fed to backtrack and stall any further interest hikes.

In the face of such challenges the BOJ would have itched to intervene and force the yen down through a number of took it has at its disposal.

That would likely worsen global economic instability because it would trigger a currency war with other economic powerhouses like Germany or the Uk.

It is more likely that Japan’s central bank will follow the ECB and expand it’s current quantitative easing stimulus program.

On March 10, the ECB said it would now also be buying back bonds from companies, in addition to financial institutions. The BOJ may resort to doing the same with Nikkei stocks.

That hasn’t produced immediate results in Europe and the momentum for Japanese recovery looks to be slow and uneven in 2016.

In the meantime, Japanese investors will be eyeing a key policy meeting on April 28.

By Firas Al-Atraqchi for The BRICS Post