Japan's monetary easing a double-edged sword

The Bank of Japan (BOJ) on Wednesday opted to continue its bold monetary easing policy to combat the nation's crippling deflation and hit the government-set 2 percent inflation target in two years.

The central bank, following a two-day policy meeting, announced at a press conference earlier the day that the economy had started to pick up thanks to recovering overseas economies and also cited increased domestic consumption and output as contributing to the recent uptick.

The BOJ raised its assessment of the nation's economy for the fifth consecutive month from a previous view that the economic slump had halted and was "showing some signs of picking up."

"We have moved our economic assessment one step forward as there are more bright developments in personal consumption, capital spending and industrial output," said BOJ Governor Haruhiko Kuroda after the policy meeting.

The BOJ policy board voted unanimously to increase the monetary base at an annual pace of 60 trillion yen (around 585 billion U.S. dollars) to 70 trillion yen (around 682 billion dollars), following aggressive monetary easing decisions made in April.

The bank said it will boost purchases of government bonds and high-risk assets like exchange-traded funds, to achieve its aims.

The central bank's current assessment has been heavily influenced by the yen's recent slide, with the Japanese currency falling 23 percent against the dollar since mid-November, largely due to market reactions to Prime Minister Shinzo Abe's hawkish economic policies, dubbed "Abenomics".

But trade data released Wednesday revealed how the yen's slide has pros and cons for Japan Inc., as pointed out by leading economists.

A fall in the yen while seemingly benefiting Japan's export- reliant manufacturing sector by making products more affordable in overseas markets, concurrently raises the costs of essential imports -- particularly natural resources -- which Japan is sorely lacking in.

In the wake of the Fukushima nuclear crisis, Japan's nuclear power plants remain shuttered and the nation's reliance on expensive fossil fuel and liquefied natural gas imports, to drive its thermal power stations, has increased exponentially, contributing to a huge trade deficit.

In April, the cost of oil imports declined as crude oil prices moderated, but the value of imports of liquefied natural gas jumped 18 percent from a year earlier, official figures showed.

According to preliminary figures released by the Finance Ministry earlier Wednesday, Japan's trade deficit widened to a larger-than-expected 879.9 billion yen (around 8.6 billion dollars) in April, as the yen's slide pushed up import costs, marking the 10th straight month that imports have outweighed exports.

The government here reported that while exports rose 3.8 percent in the recording period from the same month a year earlier to 5.78 trillion yen (around 56 billion dollars), imports surged 9. 4 percent to 6.66 trillion yen (around 65 billion dollars), with the trade deficit standing at 362.4 billion yen in March -- half the size of the deficit logged in February.

Economists have been quick to note that Abe's economic policies, thus far, haven't fully heeded the dire need for Japan to significantly bolster its exports, as a specific roadmap to this end, has yet to be announced under the "Abenomics" banner.

Highlighting the need for Japan to shift more goods overseas, in the fiscal year that ended in March, Japan's trade deficit rocketed to a record 83.4 billion U.S. dollars as imports surged -- a 14.8 percent increase in exports to the United States did little to offset diminished demand from China following a Tokyo-triggered territorial row and falling exports to debt-plagued Europe.

Japan's imports from China, however, surged 13.3 percent in the recording period, with the deficit hitting a record high of 60 percent at 442 billion yen (around 4.3 billion dollars).

Senior economists have stated that Japan's trade balance may not move out of the red until the middle of next fiscal year and hence despite the BOJ's upbeat assessment,the downside effects of the weakening yen and the widening trade deficit are being highlighted by strategists as painting a clearer picture of what may be in store for Japan, and have dubbed Japan's current economic expansion of 3.5 percent in the January-March quarter, announced last Thursday, as an "economic sugar high," which is likely to wear off.

Recent surveys here have shown that many Japanese companies do not wish the yen to slide any further, with almost half of them saying they want it to stabilize at 100 to the dollar.

Almost a third of the companies polled, in fact, said they'd like to see their currency strengthen back to 95 to the dollar. Following a steady exodus of Japanese manufacturers overseas to escape a perpetually high yen over the past few years, a weaker yen sees their profits diminished when repatriated.

Further declines in the yen, brought about by state-sanctioned forays into the currency markets, will likely draw a sharp backlash from the global community, including the Group of Seven and the Group of 20 major economies, who are keen to avert a Japan- led global currency devaluation war.

To this end U.S. Treasury Secretary Jack Lew stated earlier this month that while Japan's economic growth is to be welcomed, Tokyo should respect the "ground rules" of international currency agreements against manipulating exchange rates to seek export advantage.

More recently Lew was quoted as saying, "People say the excessively strong yen has corrected quite a bit. If the yen continues to weaken steadily from here, negative effects on people 's lives will emerge."

Japan's Finance Minister Taro Aso has also conceded that the yen's decline is a double-edged sword for the nation's economy and that the government is responsible for rolling out safeguards to protect companies that are, or are in line to being damaged by the yen's recent slide.