Japan Financial Easing

Last Friday, stocks closed quite high – the Dow was up 0.2 percent, the Standard & Poor was up 0.4 percent, and Nasdaq 0.8 percent. That marked the third straight week of general gains all around and new record highs for both the Dow and the S&P.

Much of the investor and analyst attention focused on the relationship of the U.S. dollar versus other national currencies – chiefly the Japanese yen. That currency has steadily weakened against the dollar.

CNNMoney reports that the Nikkei was up 3 percent (hitting a five-year high) recently. Meanwhile, the yen was at ¥101 just a day after it hit ¥100 for the first time in nearly four years.

Altogether, the yen has fallen 15 percent against the dollar in 2013 alone, and it’s largely because of the Bank of Japan’s determined effort to combat deflation. It’s doing that by simply injecting more and more bills into the economy, similar to the U.S. Federal Reserve’s monetary easing plan.

It’s also possible, though, that the U.S. recovery – which has received increasing attention in both domestic and international media – has contributed to this dynamic. Nationally, the housing market has been doing well. Tax revenues are higher than expected. The debt limit drama will likely be pushed further back toward October rather than occur over the summer. Freddie Mac and Fannie Mae have reported surprisingly healthy figures.

Nonetheless, the Federal Reserve’s asset-buying spree continues, though Bernanke has stated that the central bank is observing market movements carefully (to state the obvious).

At the recent Group of Seven major financial meeting, Tokyo mentioned that it has not faced any serious criticism about its current policy actions, despite a warning from the U.S. that Japan’s currency movements are under careful observation.

Artificially Deflated Yen?

What’s at stake here is, basically, what China had been doing for many years – artificially suppressing the national currency in order to prolong competitive advantage. As of Friday, after all, the yen was at its lowest in four years against the U.S. dollar and at around a three-year low versus the euro.

Following a sizable stimulus plan that the Bank of Japan launched back in January, investors over there have moved increasingly into foreign bonds, reports Reuters. The actions come together to form a fairly suspicious picture; it appears that international skepticism is focusing on the possibility that Japan is artificially devising a recovery championed by exports, thus infringing on neighboring regions’ growth.

However, international powers are also at risk of contradicting themselves. Japan’s dismal economy, anemic growth, and generally unhealthy economic policy had been a topic of contention for several years. Now, when Japan finally demonstrates improvement, it’d be risky to openly criticize that.

Moreover, when the Bank of England and the U.S. Federal Reserve have freely printed money, it’s hard to point fingers at the Bank of Japan for basically doing exactly the same.

Long Economic Recovery

Japan’s economic anemia has stretched over the past twenty years, roughly speaking. It’s only in the recent past that Shinzo Abe, Japan’s newly-elected prime minister, has pursued steps that may best be described as bold.

You may wonder why international powers would be concerned about a weakening currency. But that’s exactly what helped China become a growth superpower for the past several years. A lowered currency equals competitive advantage, and that makes Japanese exports a lot more competitive internationally.

Toyota Motors (NYSE: TM), for example, indicates that net income over the past 12 months has increased threefold. Sony (NYSE: SNE), for the first time in nearly five years, reported an overall profit. And thanks to the newly weakened yen, both companies indicate future expectations of strong profits.

And within Japan, the era of depressed wages and prices is likely about to shift dramatically into a period of increasing inflation. The Bank of Japan aims for a goal of 2 percent inflation, reports the New York Times.

But as the growing international speculation shows, Japan’s new-found charge is cause for concern to other nations. That’s why Japan’s administration is deflecting attention toward the resurgent U.S. economy and dollar, suggesting that much of Japan’s recent turnaround can, in fact, be interpreted as a consequence of events within the U.S.

In short, Japan is arguing that the Bank of Japan is not explicitly pursuing a policy of weakening the yen artificially (which would be dodgy and likely invite international criticism). Rather, events worldwide – and particularly within the U.S. – have resulted in pushing the yen downward.

In any case, Japan still needs to deal with an aging population and excessive regulations in addition to the yen question, so the next few months will be very interesting. 

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