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Why Japan’s plan to double its money is good news for Australia and the world

Two new leaders ready to shake things up Japan’s new leader, Shinzo Abe, heads up the Liberal Democratic Party. Ironically, this is the party that has presided over the decades of paralysis. The LDP’s been in power almost continually since 1995. Abe was first elected prime minister by a special session of parliament in 2006. […]
Myriam Robin
Myriam Robin
Why Japan’s plan to double its money is good news for Australia and the world

Two new leaders ready to shake things up

Japan’s new leader, Shinzo Abe, heads up the Liberal Democratic Party. Ironically, this is the party that has presided over the decades of paralysis. The LDP’s been in power almost continually since 1995. Abe was first elected prime minister by a special session of parliament in 2006. He was then Japan’s youngest prime minister, and the first born after WWII. Very unpopular, he lasted less than a year in the job. The 2012 election was his comeback. He had two main campaign goals: to revise parts of Japan’s pacifist constitution, and to fight deflation.

The man he has empowered to address the latter is the new BoJ governor he appointed in February, Haruhiko Kuroda.

Former IMF staffer Kuroda has quite a reputation in Japan. He has persistently criticised the BoJ for its conservative approach to monetary policy. In fact, he wrote a book on the subject in 2005. In economic lingo, he’s a monetary “dove”.

Last Thursday was Kuroda’s first meeting as the BoJ head. Everyone expected he’d do something to push inflation higher. But few analysts expected something as radical as what he announced. The Japanese stock market, which had been down, duly rallied on the news.

Within two years, Japan aims to have 2% yearly inflation, and to do that, the BoJ will roughly double the amount of money they put into the economy. Using new money, the BoJ will buy up securities, government bonds, shares in real-estate trusts, and other assets to force money onto the balance sheets of Japanese banks. With plenty more money to play around with, the banks will be under pressure to lend some of it out. The hope is they’ll lend out enough to give Japan some inflation. Given the sheer amount of money the BoJ plans to inject, there’s a good chance it’ll work.

America’s economy is about three times the size of Japan’s. But Japan will be printing almost as much money as America does every month (Japan will print $US79 billion worth of yen a month. America prints $US85 billion a month). Under Federal Reserve chairman Ben Bernanke, America has the most expansionary monetary policy it’s had in decades. Japan is matching it.

What does this mean for Australia?

Oliver welcomes Japan’s plan.

“It’s unambiguously good for Australian consumers,” he tells LeadingCompany. The immediate effect of monetary easing in Japan is likely to be a fall in the value of the yen relative to the Australian dollar. Our main imports from Japan are consumer goods and machinery, and these will be cheaper for Australian consumers and retailers to import.

Australia’s main exports to Japan are primarily primary products like resources. While these may suffer from the relatively higher dollar, Oliver says focusing on this misses the big picture. “If Japan’s economy becomes stronger, then that will mean more demand for our resources exports,” he says.

One negative might be Australia’s tourism industry. While the value of Japanese tourism in Australia has declined as Chinese tourism numbers grew, a weaker yen could mean fewer Japanese tourists come to our shores. “But then again, as their economy becomes stronger, they might travel more,” Oliver adds.

When it comes to the Australian dollar’s valuation against the American dollar, which has made Australian goods expensive for many overseas buyers, Japan’s monetary easing is likely to have little impact.

What does this mean for the world?

Some countries do lose out from Japan’s plan.

Taiwan and South Korea, for example, compete with Japanese manufacturers in many industries. A weaker yen means some might opt for Japanese goods over those from such countries. Oliver thinks this might force the Taiwanese and South Koreans to look at some monetary easing of their own.

Broadly though, Japan’s actions are likely to drive global growth.

“Japan is the world’s 3rd largest economy,” Oliver says. “If a major country starts printing money aggressively, that’s positive for the global economy. It’s positive for global demand, and adds to global growth.”

“America’s been undertaking quantitative easing over the last four years, and that’s forced other countries to do the same. Japan’s partly responding to that. And Japan might force other countries to do more in turn, for fear of suffering a competitive disadvantage. I think this is more positive than negative.”