For the first time in 10 years we are starting to see something interesting happening in Japan. We h...
For the first time in 10 years we are starting to see something interesting happening in Japan. We have the most unpopular prime minister in post-war history, a fiscal deficit of 6% of GDP, a spending Government but a corporate Japan that has stopped borrowing to repair its balance sheets, and a stock market that has hit a 15-year low.
With a sense of crisis, the time for change seems to have come and the Bank of Japan (BoJ) has returned to its zero interest rate policy, abandoned only seven months ago. No doubt it was forced, but Japan is really doing something different this time. After a decade of easy fiscal but tight/neutral monetary policy, Japan is switching towards a mix of tight fiscal and easy/neutral monetary policy.
The focus is undoubtedly shifting towards unorthodox macro methods in the context of Japan, which include quantitative easing and inflation targeting. The BoJ has now done what it can, providing the necessary conditions for banks to write off bad loans and start the economy moving. It is now up to the Government to come up with something to make a real impact.
Monetary easing will probably do little to generate a substantial stimulus. However, the BoJ's strong policy intention might reduce deflationary expectations at the margin, which could help encourage some economic activity.
Moreover, we know monetary policy cannot correct the still overdue problem of cutting excess capacity and excess savings.
An aggressive step-up of structural reforms would be a long-term task. Unless structural reforms and change in monetary policy are addressed simultaneously, and soon, markets may force the issue. The collapse of a big bank might speed up the process. It looks like many things are still unclear on the effectiveness of policy changes but one thing seems certain, the yen will weaken further.
Further depreciation of the yen looks inevitable, driven by the decline in the current account surplus and changes in policy mix. Weaker yen is the easiest choice. The combination of less recycling of exporters' dollars back into yen, plus less entrapment of domestic savings by rising bond issuance, points to a weaker yen. Combined with the expected upturn in global demand growth from 2002, this should lay the foundation for the next export-led recovery in Japan's industrial cycle.
As we all know, the effectiveness of any policy changes in Japan is questionable. Pressure is now on the Government to speed up economic reforms. These include tackling its own debt, opening domestic industries to competition and deregulation, getting banks to write off bad loans, and to encourage a more entrepreneurial culture.
The risk is that nobody, especially policy makers, really knows what has gone wrong. Nevertheless, monetary easing should have a positive impact on the stock market.
John Li is manager of the Framlington Japan fund
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November