2013-03-26 – London
New Bank of Japan governor pledges to target 2% inflation
Haruhiko Kuroda, the new governor of the Bank of Japan, has promised to tackle most of the problems associated with deflation, in an effort to combat Japan’s economic woes. Deflation has a severe economic contagion effect, causing consumers to postpone their spending, resulting in poor performance by companies and in turn causing a rise in unemployment.
Japan has experienced mild deflation over the past couple of years although it has been battling deflation for over 20 years. The new inflation target of 2% is double the previous target. Policies such as quantitative easing and the resulting weakening of the yen could potentially help to stimulate growth, and in the process increase inflation.
Haruhiko has hinted that significant investments in property will be made, and he plans to continue introducing money into the financial system by purchasing government bonds. The question is whether a different strategy will be used to prevent other asset bubbles from forming. The large-scale purchase of government bonds had been planned for 2014, a delay which many analysts find surprising.
A weakening of the yen could help Japanese exports, and may be achieved through quantitative easing. The hope is that this will increase production due to supposedly higher demand for cheaper goods; this in turn may encourage companies to hire more staff, thereby reducing unemployment.
However, with the global economy still in a delicate state, the export market will remain weaker, albeit improving slowly. The weakening of one of the main world currencies carries the risk of further fuelling the so-called ‘currency wars’ between leading economies. Furthermore, experts argue that even a 10% devaluation in the yen would probably have only a minor effect on the overall Japanese economy.
The challenges facing governor Haruhiko are great. Effective and aggressive economic stimulus will be required, while keeping a close check on potential asset bubbles.
Japan needs a fresh approach to stimulating its economy and needs a new and robust growth model. Creating policies which may assist in stimulating the economy could itself take more than a couple of years, before the task of implementing such policies can even start.
