Thursday, February 28, 2013
Yen and now: Japanese monetary concerns
In recent years, Japan has been faced by many environmental and financial crises have impeded the operation of their government. With the Fukushima Daiichi nuclear disaster and the Sassago Tunnel disaster looming in recent memory, the current state of Japans infrastructure has been brought into question. Prime Minister Shinzo Abe promised a massive public spending budget to ail the woes of Japans lackluster infrastructure. Reaching nearly 13 trillion Yen or $150 billion, the aim of the public spending would be jolt the economic environment out of their current recession. Currently Japan has the highest public debt to GDP ratio in the world, nearly 200%. To alleviate the fiduciary problems facing the country, the Bank of Japan has been pressured to print more money. By printing more money the Bank of Japan will weaken the Yen, thusly making it more attractive to foreign investors and aiding domestic exporters, mainly within the automotive and electronic markets. Many officials within the Japanese government have cited the waste of revenue upon projects with have no economic benefits. Presumably, deficit spending on domestic programs will aid the Asian nation in the short run, the price tag attached to these programs seems too high to warrant. Prime minster Shinzo Abe, proposed nearly 200 trillion Yen (nearly $ 2 trillion dollars) in domestic projects over the next ten years. Furthermore, the weakened Yen, falling from 82 Yen per dollar to 88 Yen per dollar, has casted a doubt upon the primer ministers aspirations. Skeptics within the Japanese government state that the plan is inherently risky. Mainly the systemic risk emerges if government–bond yields increase without a corresponding rise in the inflationary expectations. The Abe administration claims that if the consumer market for the government bonds weakens, the Bank of Japan may purchase these bonds to stabilize the Yen. Only time will tell if Japans infrastructural problems can be aided by the government pro-active Keynesian policies.
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Interesting post - very nice.
ReplyDeleteIs there an alternative other idea?
I see the following:
The Japanese economy is not so hot because of...
- Financial crises
- Natural disasters
Plan to fix: Japan is going to print money to attract investment, make exports more competitive and invest in government projects.
Some say this approach is risky.
Is there another idea or is this the only option on the table for Japan?
Also, how will these ideas impact trade?
In the recovery plan, has Japan's government considered any of the trade concepts we discussed in class?
The approach of printing money and investing in domestic projects is very risky. How is Japan going to repay its debt to the world if it has one of the world lowest birthrates of 1.4 babies per woman. This policy will have detrimental effects on the next generation which will inherit this enormous debt. If the Japanese debt burden is around 230% of GDP, how long can the Japanese live on borrowed cash?
ReplyDeleteSomeone should do a study about this: How long can anyone live on borrowed cash? Japan and the US both have huge deficits but their standard of living is still better than 90% of the rest of the world. At what point will this begin to backfire, if ever?
DeleteIf they are going to try and boost their economy they best way for them to do so is to bost their exports by depreciating their currency... but how will the ensuing inflation effect Japan's economy?
ReplyDeleteWell Japan's depreciating currency will only provide opportunities for Americans to begin free-trade negotiations with Japan, something that politicians in the US have sought in order to establish more of a presence in Asia. A US-Japanese free trade agreement could alleviate some of the spending programs that Japan will have in place, but Japan will also serve as a "pivot" against China and an important ally against North Korea.
ReplyDeleteI disagree. I don't think that depreciating the yen will lead to more free-trade negotiations. By printing more money and thus devaluing the yen the Japanese government would make exports more competitive and imports more expensive. Thus the Japanese trade balance would tip in favor of exports. Although the United States and Japan (and several other countries) are considering a free trade agreement, depreciating the Yen would only help Japan and not the other nations involved in the agreement. (http://www.economist.com/blogs/banyan/2011/11/free-trade-agreements).
ReplyDeleteHowever, I do believe that a free-trade agreement between the United States and Japan is a strong possibility. The Obama Administration's foreign policy is "shifting to asia." Japan is an important ally in Asia and the United States should take steps to cultivate that relationship. Additionally, the Doha bargaining round has stalled and doesn't seem likely to conclude any time soon. As a result, countries are better off making free-trade treaties outside the formal WTO bargaining rounds.
If there is just a higher inflation target, there may not be anything changed in Japan. A higher inflation target plus the threat of a losing power if the Bank of Japan doesn't take the target seriously could change a lot. Depreciating the yen may help Americans and create more trade agreements...
ReplyDelete