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Japan launched economic stimulus package to boost the economy - risk of “currency war”

Bank of Japan (BoJ) surprised the market by its decision to launch stimulus package to boost the economy, doing the same way of the US and Euro for a past few weeks.



BoJ decided to pump 10 thousand bil to expand its property purchase program, extending the validity till the end of 2013 due to the difficulties in global and local economy. The action immediately decreases the price of yen, causing a lot of wondering if the world will witness another currency war.

Analyst Micheal Hewson of CMC Markets said: “worrying that yen’s rise continues to cause difficulties to Japanese policy makers and economic activities begin to go down, BoJ decided to reconsider yen’s rise management methods, which badly affected export business of the country. The 3rd Quantitative Easing (QE3) of FED last week did not benefit the Japanese when the yen value was increased and BoJ decided to take action shortly in order to reduce the impact of FED’s action on the yen as well as stimulate economic growth.

Last week Chairman of FED, Ben Bernanke announced that it would launch a third round of open-ended bond-buying, also known as QE3. Obviously FED did not mean to weaken its dollar when announcing the program even though the financial strategist, Camilla Sutton from Nova Scotia (Canada) noticed that FED was fully aware of its policy, which is “weak US dollar”. ECB, under the leadership of Mr. Mario Draghi, even took action two week earlier.

The recent actions of the 3 biggest central banks of the world, together with the same possibility of People’s Bank of China reminded several observers of the currency war last year. In fact, those actions of FED, ECB and BoJ make emerging – markets retaliate by loosening their monetary policies or self-managing the capital flow in order to prevent “hot” capital flows into their economies and to make more revenue.

A weak local currency supports exporting business of a nation through reducing costs of their production at a foreign market. And a stronger currency causes them troubles. A typical example is Canada dollar’s continuous rise has increased its trade deficit, hitting the record in last July.

Hewson noted Japan had maintained their easy monetary policy for years but they still could not improve the economic growth rate. The Conclusion by BoJ on 19/9 was inevitable once FED decided to print more money last week because FED’s decision put more pressure on Japanese exporting enterprises. Despite announcing to pump only 10 bil yen, there is still a possibility that Japan has to pay more than that because Mr. Bernanke and Draghi committed to buy the unlimited properties.

Although the result of decision to stimulate economy by BoJ is not obivious, Mr. Adam Cole – economist of RBC assumed the BoJ’s action is not suitable for yen. According to Mr. Kit Juckes – Exchange Rate Manager of a French bank named Société Générale, it is not certain if BoJ is forcing local investments to leave yen and turn to a foreign currency, but loosening monetary more is always warmly approved in Japan, a country facing continuous deflation over a decade. 

Source: Vietnam Goverment Portal 

 

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