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Japan vs. the Currency Speculators

TOKYO – With Japan’s economy struggling to escape its deflationary torpor, the economic-revitalization plan that Prime Minister Shinzo Abe launched in 2012 has come under growing scrutiny. But Japan’s current travails, which have brought a concomitant decline in Japan’s stock market, stem from the yen’s appreciation – 24% over the last year – against major currencies. “Abenomics” – which included substantial monetary and fiscal expansion – has nothing to do with it.

Since Abenomics was introduced, Japan’s labor market has improved considerably: 1.5 million new jobs have been created, and the unemployment rate has fallen to just over 3%. Moreover, corporate profits have soared, and tax revenues have increased by more than ‎¥20 trillion ($188 billion).

To build on these gains, Japan has promised a large fiscal expansion next month, which some describe as a piecemeal, temporary version of so-called “helicopter drops” (permanent monetization of government debt). But there is concern that it will not be enough, if the yen continues to appreciate.

To be sure, expansionary policies, particularly monetary policies – a pillar of Abenomics – could contribute to currency depreciation. But the US Federal Reserve’s dovish approach to exiting its own quantitative-easing program, together with expansionary policies in other major economies, has weakened their impact on the exchange rate.