Japanese authorities’ efforts to lift the moribund economy showed progress on Thursday, as the yen breached an important level against the United States dollar.
Since taking office in late December, Prime Minister Shinzo Abe has made beating deflation a major point of his economic policy, prompting the central bank to pour money into the economy. That policy is bearing fruit, as the yen weakens against the dollar and other world currencies.
With the yen falling, the dollar is now valued at more than 100 yen, a level not seen in four years.
The yen’s move is kindling inflation in an economy that has long been moribund, in the process delivering a competitive boost to the country’s big exporters. The promise of reflation has also had an effect on the stock market; the Nikkei has risen throughout this year on the anticipation of laxer policy.
The Bank of Japan has moved aggressively to reinvigorate the economy and fight deflation.
Last month, the central bank announced a decisive break with its earlier policies. Instead of focusing on keeping overnight interest rates close to zero – which seemed to be having little effect in reviving growth – the central bank aimed to double the amount of money in circulation, seeking to produce annual inflation of about 2 percent.
The promise to drastically change Japan’s economic policy and end the long, debilitating era of deflation has caused the dollar to rally for much of this year. By midafternoon in New York, the dollar was valued at 100.53 yen.
With this move, the yen has fallen nearly 14 percent against the dollar this year. The only currency that has fallen by more is the Venezuelan bolívar.
Japanese officials say the policy does not overtly target a lower yen rate, which could raise tensions with other exporting nations like the United States. But a weaker yen is a welcome development in some ways. A number of large Japanese companies have reported banner profit in recent weeks, driven in part by the drop in the currency.
On Wednesday, Toyota reported net income of 313.9 billion yen, or $3.17 billion, in its latest quarter, as the value of its overseas earnings increased in its home currency and production in Japan became more cost-efficient. Sony also cited the yen in its latest earnings report.
The efforts by the Bank of Japan to continue to flood the economy with liquidity is likely to keep downward pressure on the yen in the coming months. The central bank is following an asset purchase program to inflate the economy by aggressively buying longer-term bonds and doubling its government bond holdings in two years.
The depreciation of the yen may be a step in the right direction as the authorities try to fuel some growth. However, Japan still faces many stiff challenges until it breaks out of its period of deflation. It has an aging and shrinking population and cumbersome regulations that make the economy inefficient, and it is not clear that monetary policy alone can end stubborn deflation in Japan.
As he has tried to put a new focus on reviving the economy, Mr. Abe fought with the central bank’s former leaders over setting the 2 percent inflation goal. Mr. Abe’s pressure in the end led to the resignation of the bank’s previous governor, the moderate Masaaki Shirakawa. His departure led to the appointment of Haruhiko Kuroda, who shares Mr. Abe’s economic philosophy.
As it pursues its new policy, the Bank of Japan is buying longer-term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to 270 trillion yen by March 2015.
In this way, the bank will buy about 7 trillion yen in bonds each month, equivalent to over 1 percent of its gross domestic product. That is almost twice the bond purchases of the United States Federal Reserve Bank.
Article source: http://www.nytimes.com/2013/05/10/business/dollar-breaches-100-yen.html?partner=rss&emc=rss
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