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Japan's central bank sent shock waves through financial markets at the end of last week by ramping up its purchases of government bonds and assets to try and achieve its somewhat arbitrary inflation target and kickstart an acutely obstinate economy.
But questions are now being asked about the central bank's autonomy from the government and in particular the finance ministry, which analysts suggest has and continues to be dragooned by Prime Minister Shinzo Abe, as the hawkish leader tries to salvage his aggressive "Abenomics" brand of economic policies and spare his own blushes in the run up to the general election scheduled for the year after next.
On the one hand experts attest that part of the Bank of Japan's (BOJ) latest bid to buy up massive amounts of assets, was aimed at, as an element of the central government's broader monetary and fiscal stimulus program, jolting the floundering economy back into action, but on the other hand, the immediate result was a significant devaluation of the Japanese currency, although both motives are, of course, inextricably linked.
In fact, following the BOJ's move to inject trillions of yen into financial systems to trigger spending, against a backdrop of failing initiatives by Abe under his ailing "Abenomics" blueprint for reviving growth -- including the April consumption tax hike from 5 to 8 percent which almost derailed the world's third largest economy entirely as consumption weakened, corporate investment dropped, industrial production waned and exports slumped -- while raising expectations of higher inflation and encouraging the nation to spend, literally "forced" the yen to plummet to seven-year lows versus the U.S. dollar.
Granted, the Bank of Japan's plans to increase its purchases of government bonds and other assets by between 10 trillion yen and 20 trillion yen (91 billion to 181 billion U.S. dollars) to about 80 trillion yen (725 billion dollars) annually, will, as some economists point out, ensure lower bond yields, rising stock prices and a lower yen, which are all plusses for the economy here in the short-term, but the longer-term prognosis remains unclear, economists noted.
Local market analysts have questioned whether the long-term plans of the central bank have been properly thought through, as its chief, Haruhiko Kuroda, has mentioned no end game, and although being hailed by some as an economic genius, unleashing an arsenal of QE weaponry, just two days after the U.S. Federal Reserve decided to end its own asset purchasing program, others claim he's a pawn of the finance ministry, and, hence Abe himself, and has simply picked up the government's slack as the economy has spluttered and spurted, but, invariably, failed to burst into life.
"The BOJ is supposed to be autonomous from the finance ministry, but questions have been raised about the two working into cahoots to, primarily, fix the yen at the lowest rate possible for as long as possible, in a bid to buoy the nation's key export sector, and, thereafter, attempt to hit the bank's arbitrary inflation goal of 2 percent in two years," a senior investment analyst at Nomura Asset Management told Xinhua.
"In short, flooding the market with newly printed money pegs the yen at a very conducive rate for exporters and raises their profile in their respective overseas markets. The profits made are then repatriated here and when converted back into yen become largely inflated," the analyst said. "It's a simple move and we've seen it here numerous times before, but, in the short time, it irks other large economies, as we've seen from some Group of 20 world leaders, who in 2010 basically agreed not to launch competitive devaluation as it could trigger 'currency wars' or the exporting of deflation by such devaluation. "
"Since then, world leaders have tended to turn a blind eye to Japan's unilateral and open forays into currency markets to devalue the yen, under the commonly held assumption that QE does not constitute the start of a 'full-scale currency war,' but this won't last forever. Other countries could do the same and escalate such a currency war or retaliate with trade blockades or launch more aggressive economic weaponry against Japan," the investment analyst said, requesting his name be withheld.
"It's all theoretical at the moment, but Kuroda has hinted that he's not necessarily finished yet and the BOJ stands poised to act again if it deems necessary. Leading economists seem to agree that with the prime minister standing to benefit politically as his elusive structural reforms appear to pay off, Japan could indeed risk waging a currency war in order to hit its inflation target, inject some life into the economy and allow the prime minister to go ahead and raise the sales tax again next year, and, claim all the credit for the inevitable economic uptick ahead of the elections," he said.
Along with other sources close to the matter, the expert added the current goals were all relatively short-sighted, with the longer-term effects possibly leading to more "stealthy" economic woes globally, which will force other economies and their central banks to react to protect their producers and employment market. This in turn would lead to an increased "wheeler-dealer-type" of clandestine currency manipulation here by the government, by way of the BOJ and or the finance ministry, that previous administrations have caught a lot of flak for, and so the tit-for- tat problem escalates globally,
It would seem to be then that the consensus among leading economists is that it is a question of when, not if, other economies stop turning a blind eye to Japan's intentional currency devaluating moves and foreign policymakers start to take decisive action to combat the effects, with the ultimate outcome being increased global deflation. Thus, Japan may win in the short time, but could find itself as the catalyst for a global economic downturn, economists have surmised.
Hence, in answer to the question: is Kuroda an economic genius? Economists and market analysts are leaning towards suggesting that he is, indeed, not. That said, he has been described by one notable analysts here as resembling an "aggressive hedge fund manager," doing what needs to be done immediately and seemingly content to deal with any fallout at "some point down the road."
"The BOJ took markets by surprise last week, but this had to happen at some point for Abe to even to be able to contemplate hiking the sales tax again next year and rebooting his economic policy drive, so in actuality it was no surprise at all," pacific affairs research analyst, Laurent Sinclair, told Xinhua.
"What remains to be seen is how ballsy is the BOJ going to be henceforth and how much of this is Abe's influence? What we can expect, I believe, is that future devaluation will result in other banks going on the offensive, as economic wars are essentially fought between central banks," Sinclair said.
