Japanese Prime Minister Shinzo Abe’s policies aimed at ending deflation could distort trade, drive up asset prices in other nations and lead to global financial instability, according to HSBC Holdings Plc.
“The world seemingly has yet to find a way of coping with periods during which the Japanese have attempted to kick-start their economy,” Stephen King, the London-based chief economist at HSBC, wrote in a research report today. “The big risk for the years ahead lies in a mix of rapidly widening current account deficits, hot money inflows and a proliferation of capital controls.”
Moves by Japan to revive growth have raised concern over a so-called currency war as central bankers from New Zealand to Norway signal they’re ready to stem exchange rate swings. Group of 20 finance chiefs this month signaled Abe has scope to keep stimulating the economy as long as officials stop endorsing the yen’s more than 10 percent slide in the past three months.
“If Mr. Abe’s policies work primarily through a weaker yen, Japan’s main export competitors will find themselves in the firing line,” King wrote. “The most vulnerable include Germany, South Korea and China.”
The Bank of Korea said on Feb. 14 that the “expansionary” stance of the Japanese government is among risks for South Korea’s economy.
Investors are cheering Abe’s brand of economics, with the Nikkei 225 (NKY) Stock Average advancing for 12 weeks through Feb. 1, the longest winning streak since 1959. The benchmark fell from a four-year high today after Italian elections reignited concern the region’s debt crisis will hurt financial markets.
Abe has pledged to use monetary easing, fiscal stimulus and growth-boosting policies to lift the nation out of more than a decade of price falls.
“Mr Abe’s policies may ultimately deliver the goods but there is a very good chance that, instead, his measures will only lead to further global financial instability, in turn triggering an increase in economic nationalism,” King wrote in the report.
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