It seems as if every day we hear more about the massive monetary stimulus instituted by Ben Bernanke and the U.S. Federal Reserve.
But for all the attention the Fed’s QE3 receives, the most consequential quantitative-easing program in the world may not be emanating from Washington D.C. but from halfway around the world.
Japan has suffered through decades of stagnation and deflation, but the new Japanese prime minister, Shinzo Abe, is addressing the problem head-on. At his direction, the Bank of Japan is flooding the world’s money markets with 7 trillion yen ($70 billion) each month. Based on the relative sizes of their economies, this stimulus package is much larger than the Fed’s QE3. And it is having a bigger impact.
The goal of Japan’s monetary stimulus, which is being called “Abenomics,” is to reduce the value of the yen. A weaker yen boosts the competitiveness of Japanese exports on the global market, and allows Japanese companies to increase profitability when they repatriate overseas earnings.
The Results of Abenomics
By most standards of measurement, Japan’s stimulus program seems to be working. The yen recently slipped to its lowest level against the U.S. dollar in more than four months, and the Japanese currency is now worth 30 percent less than it was a year ago.
|The decline in the yen, and the resulting increase in sales and profits among Japanese companies, have had a very positive effect on Japan’s stock market.|
The impact of the weaker yen is already being felt in Japan and around the world. We’re seeing more cars, robots and flat-panel TVs being shipped abroad. Perhaps the biggest beneficiary of Abenomics has been Toyota. The automaker’s profit soared 70 percent in the latest quarter from a year earlier. And much of that improvement can be directly attributed to the weaker yen — 64 percent of Toyota’s profits are linked to the currency exchange rate.
The decline in the yen, and the resulting increase in sales and profits among Japanese companies, have had another positive effect: a major rally by Japan’s stock market. The benchmark Nikkei 225 has rallied 72 percent this year, the best performance among major developed markets.
Abenomics and You
Outside of Japan, the direct impact of the weaker yen is lower prices for Japanese goods. In other words, Japan is exporting deflation. And there’s every indication that this trend will continue.
Encouraged by the success of Abenomics, the Bank of Japan is likely to continue its yen-printing spree at full speed. Meanwhile, there’s a good chance that the Federal Reserve will begin to taper its own quantitative-easing program in the next few months. As a result, the U.S. dollar should continue to strengthen against the yen, possibly to as high as 110.
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