Japan’s destabilizing contribution to the global economy
Japan’s dramatic shift in monetary policy over the last few months toward massive Fed-like QEs is intended to generate domestic inflation and stimulate its economy. It was initially welcomed by markets generally and Japan’s equity market in particular. However, on closer examination the associated sharp drop of the Yen is harmful to the global economy. Unlike the US, where expansionary monetary policy helps the global economy because America is a demand engine, Japan’s high savings rate and export oriented economy is a supply engine. Lowering Japan’s export prices thru currency depreciation, making it even more competitive, exacerbates excess global capacity and is thus deflationary and destabilizing. One need only look back at the contribution of currency devaluations to the global depression of the 1930s to appreciate the riskiness of this policy.
While markets are almost exclusively focused on whether the Fed will continue or curtail supplying unlimited liquidity, a bigger concern should be Japan’s effort to grow its own export-led economy thru currency depreciation in a weak global economy. This may prove far more important in determining the fate of global equity markets.
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