Japan Goes For Broke With Plan To Beat Deflation

Lisa Smith, BA (Hons), CeFA

Japan has unveiled a massive stimulus package in a bid to beat years of deflation and falling prices and get the country’s economy growing again.

The new chief of Japan’s central bank, Haruhiko Kuroda, has shown that he is keen to spend in a bid to meet a 2% inflation target.

The move follows recent calls from the Japanese government for the bank to do more in helping the country’s economy.

Now the bank says it will spend around £350 billion a year to buy government bonds – which is nearly 10% of the country’s GDP.

In addition to buying long-term bonds, the bank says it will also invest in high risk assets.

Change of direction

Mr Kuroda said: “Previous approaches of incremental easing weren’t enough to pull Japan out of deflation and achieve 2% inflation in two years but now we will take all necessary steps to achieve the target.”

The economy has been suffering from years of deflation and falling prices which, in turn, discourages spending and companies from investing.

The lack of spending leads to recession and low growth.

The country is determined to revive domestic demand which, it hopes, will lead to a fresh surge of economic growth.

That is why the government is keen for inflation to rise which will have a knock-on effect of boosting the country’s domestic consumption.

This is not going to be an easy task but the move was welcomed by markets which saw the yen fall against the US dollar while the Nikkei 225 index leapt by 2.2% when the bank’s decision was announced.

Yen for profits?

Yoshimasa Maruyama, an economist at Itochu Economic Research Institute, said: “It would be difficult to achieve inflation of 2% in two years but the target is now possible with these new measures.”

The move to boost Japan’s economy has been dubbed ‘Abenomics’ after the country’s Prime Minister Shinzo Abe and will see heavy investment in bonds and non-government assets such as Exchange Traded Funds (ETFs).

The move should see long-term interest rates dropping to make it cheaper to borrow money for investment over a much longer period – including in real estate.

However, financial analysts are pointing to a potential problem with the policy which could see traders borrowing yen on low interest rates and using the currency to buy money in countries with higher interest rates.

This is known as ‘carry trade’ and could weaken the value of the yen dramatically and though this would help boost exports it would do little in the eyes of critics that Japan is about to start a currency exchange war to boost its economy.

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