Central Bank Stimulus: Monetary Spam or Economic Medicine?
Last week, the yen climbed to a four-year high of 99.94 against the dollar. The surge was fueled by an announcement made by the Bank of Japan earlier in April: after months of anticipation, the nation’s central bank has decided to officially initiate a tremendous round of monetary expansion, similar to the strategy employed by the United States and other developed — though struggling — countries.
This initiative, championed by BoJ Governor Haruhiko Kuroda and Prime Minister Shinzo Abe, shares a lot in common with the highly-accommodating monetary policy seen in the U.S. However, where the Federal Reserve is throwing $85 billion at the yield curve every month, or about 0.6 percent of GDP, the BoJ will be spending 7.5 trillion yen ($80 billion per month), or almost 1.4 percent of GDP.
All of that spending is expected to take center stage in Group of 20, World Bank, and International Monetary Fund meetings scheduled for later this week and through the weekend. “Everyone is interested in a strong Japanese economy, but the repercussions of these measures and their viability need to be explored,” one G20 official told Reuters on condition of anonymity.
In February, G20 leaders pledged to avoid competitive currency devaluations, and expectations are for some sort of reaffirmation of this pledge in the coming days. This issue has been front and center among the world’s head economic honchos as major developing economies — those with the most to lose when developed countries spam the planet with money — fight for more say at the IMF.
Japan’s ambitious program has even sparked concern with developed trading partners like the U.S. A microcosm of this are the affects that a highly devalued yen would have the the automobile industry, in which Japan and the U.S. are close competitors.
Citing spending cuts in the U.S. and the ongoing — and in some cases, worsening — economic crisis in Europe, the IMF trimmed its forecast for global growth in 2013. While the IMF has suggested that developed nations should keep policy loose, it has also suggested that now is the time to start thinking about an exit strategy.
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