In less than two weeks the Bank of Japan will consider extending its easy monetary policy for the second meeting in a row—something it hasn’t done since 2003.
Under pressure from Japan’s newly elected Prime Minister Shinzo Abe, the BOJ is expected to expand its purchases of government bonds and double its inflation target to 2%. This move is expected to devalue the yen in an effort to boost exports and the broader Japanese economy.
Japan’s monetary policies will hurt Japan’s economy and the U.S. economy, says Peter Schiff, CEO of Euro Pacific Precious Metals.
“Japan doesn’t need more inflation,” he says. “They actually need a stronger yen, higher interest rates. They need to allow their economy to restructure…to shrink government. Instead they’re simply going to do more of what’s been failing for the past two decades.”
He tells The Daily Ticker that if inflation rises in Japan, Japanese citizens will likely unload low-yielding Japanese bonds in favor of higher yielding precious metals and other assets. That could force the BOJ to buy more Japanese government debt instead of U.S. government debt, says Schiff.
The countrys exports plunged 10.3% in September from a year ago, dimming hopes of rapid recovery in the Far East. Exports to Europe crashed 21pc. Shipments to China fell 14pc as the Diaoyu-Senkaku islands dispute led to a slump in car sales. Honda, Mazda, and Nissan all saw sales plunge near 30pc as Chinese consumers boycotted Japanese brands. Nomura said the export slump will push country into full recession.Stephen Jen from SLJ Macro Partners said the global storm is drifting eastwards into Asia, opening a “third chapter” of the crisis that will last well into 2013. “Many analysts have declared that the low in the global economic cycle is in place. We are not convinced,” he said, prediticting a rise in currency protectionism.
The head of Japan’s auto lobby urged the government and the Bank of Japan on Friday to quickly implement effective steps to counter the strong yen, after it hit a seven-month high against the dollar the previous day.
“The current foreign exchange level, which is far from the actual ability of the Japanese economy, goes much beyond the limits of what companies can do through efforts to cut costs,” Akio Toyoda, the head of Japan Automobile Manufacturers Association (JAMA), said in a statement.
“Japan’s manufacturing is facing a great crisis again, and if things remain this way it could have a further impact on employment,” said Toyoda, who is president of Toyota Motor Corp.
Toyota roared back to a hefty profit in the first quarter and said on Friday that it intended to build a record-breaking 9.76 million cars this year, leading a recovery by Japanese automakers after a year of natural disasters and a punishingly strong currency.
Though the strong yen continues to weigh on the bottom lines of Japanese exporters, many other things are going right for Japanese automakers. Supply chains that were severed are now up and running, and manufacturers like Toyota and Honda, racing to meet pent-up demand, are fast regaining lost ground in profitable markets like the United States. Japanese government incentives on fuel-efficient cars have revived markets at home.
The strong yen is forcing Toyota Motor and Nissan Motor to consider changes in production plans and alliance strategies, the top executives of both Japanese automakers said Thursday.
The yen, which hit a record high against the dollar in late October, has undercut profits for Toyota and Nissan, which both build vehicles in Japan for overseas markets.
To offset the strong yen, Toyota may “deepen alliances” with suppliers and dealers, Akio Toyoda, president of Toyota, said during the opening of a Toyota plant in Mississippi that will build Corolla cars now being manufactured in Japan.
Business sentiment in Japan has fallen for the first time in seven quarters as worries about a persistently strong yen and slowing exports hit corporate confidence.The Bank of Japans quarterly "tankan" survey of business sentiment released Wednesday showed that the main index for large manufacturers fell to 5 in December from 8 three months ago.The figure represents the percentage of companies saying business conditions are good minus those saying conditions are unfavorable, with 100 representing the best mood and minus 100 the worst.The result from the latest tankan — a closely watched barometer of the countrys economic health that helps the central bank guide monetary policy — is slightly better than Kyodo news agencys average market forecast for a reading of 3.The index had climbed for six straight quarters as Japan mounted a solid recovery from deep recession. But a strong yen and easing global demand are battering exporters, which have been the main drivers of Japans growth. Automakers like Toyota Motor Corp. are also feeling the impact from the expiration of government subsidies for fuel efficient cars.
For Yoshihiko Noda, Japan’s finance minister, the G20’s weekend warning against disorderly exchange rate movements suggested the yen might enjoy a "more stable" relationship with the dollar and euro.
That looks unlikely — at least if your definition of stable means an end to the Japanese currency’s climb against the greenback, an ascent only briefly interrupted last month by Tokyo’s massive yen-selling market intervention.
Last week’s gathering of G20 finance ministers and central bankers in South Korea may even have accelerated the shift, as market participants think the vaguely worded communiqué will make further currency interventions by Japan more difficult. On Monday the dollar fell more than 1 per cent against the yen to a new 15-year low of Y80.41. The US currency is now within sight of its Y79.70 postwar low.
So if the G20 consensus cobbled together in Seoul has not tamed the markets, what can Tokyo do now?
There is no doubting the concern in policymaking and business circles about the implications of a stronger currency for Japan’s faltering recovery.
Japan’s finance minister further sharpened his rhetoric on the yen’s steep gains after the Nikkei newspaper reported Japan may consider selling the yen in unilateral intervention if speculators drive up the currency.
Finance Minister Yoshihiko Noda told reporters he would respond appropriately as needed, an expression he has not used so far in his campaign to talk the currency down.
The yen rose to a 15-year high against the dollar and a nine-year peak against the euro on Tuesday amid fears the global economy is slowing, testing Japanese authorities’ resolve to stem the currency’s climb.
The sharp yen rise and declines in the Nikkei stock average have increased the likelihood that the Bank of Japan will further ease its monetary policy before its scheduled rate review next month, sources told Reuters.
"The dollar went to 83 yen, so the chance of intervention has increased, but it would take more than intervention," said Kiichi Murashima, economist at Citigroup Global Markets in Tokyo.