The Japanese yen dropped against the U.S. dollar on Monday, Dec 17, after Japan's newly elected Liberal Democratic Party vowed to print unlimited amount of currency to boost GDP numbers.
It is not clear who is offering such prescriptions to Japanese leaders, but combating deflation with monetary easing is like shooting oneself in the foot while trying to hunt the whale for lunch.
First, if prices are stable or declining, that is good for the Japanese consumers as they are motivated to save and spend prudently on products and services.
Second, deflation buoys the bond market, allowing Japanese government to borrow at much lower interest rates to finance its growing debt. If inflation fires up, it will put pressure on the existing bond holders and the consumer market, particularly fixed income dependent retirees.
On the equity side, both the Nikkei Index and the real estate market have been adjusting downward ever since the Japanese equity bubble popped. This long term correction is painful but necessary.
Monetary easing will generate short term stock market euphoria, but the long term consequences will not be healthy.
While there is little doubt that fiscal stimulus geared towards infrastructure improvements and R&D has had a positive effect on Japanese living standards and technological development, monetary easing has not driven GDP growth anywhere close to what Korea or even US have registered.
It has made the mounting public debt problem far worse, while not giving any substantial advantage to Japanese consumer goods sector in international markets. The one bright spot has been Japan's exceptionally well designed protectionist policies, which have helped insulate the Japanese industrial and service sectors from arbitrage trade, while allowing its capital goods manufacturers to dominate international markets.
Had Japan allowed yen to strengthen faster, import costs especially for energy, food and some minerals would have been substantially lower.
Despite the domestic banks flush with yen, consumer goods manufacturers have been compelled to inaugurate new factories in China and ASEAN to keep their balance sheets in black.
Unsurprisingly, the Sino-Japanese bilateral trade has expanded enormously since 1990. By 2011, it reached a record $345 Billion. This helped create millions of new jobs in Japan, while improving corporate balance sheets. Further, it generated much needed revenue for Japanese federal government.
However, now Japan needs new markets and greater trade surpluses to manage its debt load. A much faster growth in Indo-Japanese bilateral trade is exactly what is needed, not limitless dilution of yen and slow hemorrhaging of Japanese savers, consumers, and importers.
Japan's bilateral trade with India is not even 1/15th that of China, a glaring imbalance.
As Chinese labor costs rise, Japanese businesses might be motivated to open new production and service centers in India. The enormous Indian market is waiting to be tapped. Japan Inc. should grab this opportunity to save Japan from its debt.
It is not clear who is offering such prescriptions to Japanese leaders, but combating deflation with monetary easing is like shooting oneself in the foot while trying to hunt the whale for lunch.
First, if prices are stable or declining, that is good for the Japanese consumers as they are motivated to save and spend prudently on products and services.
Second, deflation buoys the bond market, allowing Japanese government to borrow at much lower interest rates to finance its growing debt. If inflation fires up, it will put pressure on the existing bond holders and the consumer market, particularly fixed income dependent retirees.
On the equity side, both the Nikkei Index and the real estate market have been adjusting downward ever since the Japanese equity bubble popped. This long term correction is painful but necessary.
Monetary easing will generate short term stock market euphoria, but the long term consequences will not be healthy.
While there is little doubt that fiscal stimulus geared towards infrastructure improvements and R&D has had a positive effect on Japanese living standards and technological development, monetary easing has not driven GDP growth anywhere close to what Korea or even US have registered.
It has made the mounting public debt problem far worse, while not giving any substantial advantage to Japanese consumer goods sector in international markets. The one bright spot has been Japan's exceptionally well designed protectionist policies, which have helped insulate the Japanese industrial and service sectors from arbitrage trade, while allowing its capital goods manufacturers to dominate international markets.
Had Japan allowed yen to strengthen faster, import costs especially for energy, food and some minerals would have been substantially lower.
Despite the domestic banks flush with yen, consumer goods manufacturers have been compelled to inaugurate new factories in China and ASEAN to keep their balance sheets in black.
Unsurprisingly, the Sino-Japanese bilateral trade has expanded enormously since 1990. By 2011, it reached a record $345 Billion. This helped create millions of new jobs in Japan, while improving corporate balance sheets. Further, it generated much needed revenue for Japanese federal government.
However, now Japan needs new markets and greater trade surpluses to manage its debt load. A much faster growth in Indo-Japanese bilateral trade is exactly what is needed, not limitless dilution of yen and slow hemorrhaging of Japanese savers, consumers, and importers.
Japan's bilateral trade with India is not even 1/15th that of China, a glaring imbalance.
As Chinese labor costs rise, Japanese businesses might be motivated to open new production and service centers in India. The enormous Indian market is waiting to be tapped. Japan Inc. should grab this opportunity to save Japan from its debt.
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