Abe’s Yen Exporting Deflation Risks Davos Tension: Currencies
Shinzo Abe’s debased yen is leaving other nations to pay the price for faster Japanese inflation.
As Japan’s prime minister addresses the global financial elite today in Davos, Switzerland, the yen is within 3 percent of a five-year low against both the euro and dollar, with analysts forecasting further declines. Its drop is one of the reasons why inflation in the euro area and the U.S. is undershooting central-bank targets, even as their recoveries gather pace, according to Barclays Plc and Societe Generale SA.
“When your currency falls heavily like the yen did, you create inflation for yourself but disinflation for others,” David Bloom, the global head of currency strategy at HSBC Holdings Plc in London, said in a Jan. 20 phone interview. “If we get to the point where inflation falls and growth looks like it’s going to be incredibly weak again, then the background for a currency war is growing.”
The prospect of slowing global inflation turning into the deflation that caused 15 years of stagnant Japanese growth is unnerving officials and investors convening for the World Economic Forum’s annual meeting. International Monetary Fund Managing Director Christine Lagarde urged authorities last week not to unleash the deflation “ogre,” while U.S. Treasury Secretary Jacob Lew warned Japan against relying on an “unfair advantage because of the exchange rate.”
The yen has fallen 19 percent versus the dollar since Abe took office in December 2012 with a pledge to end deflation through his Abenomics program of monetary easing, fiscal stimulus and policies designed to make it easier to do business. The central bank has pledged to expand the monetary base by an annual 60 trillion yen ($575 billion) to 70 trillion yen with a bond-buying plan that has helped weaken the currency and stuck with that goal today after a two-day policy meeting.
Japan’s yen dropped 0.1 percent to 104.43 per dollar at 9:19 a.m. in New York, after touching a more than five-year low of 105.44 on Jan. 2. It will slide about 5 percent to 110 by Dec. 31, according to the median estimate of more than 50 analysts surveyed by Bloomberg, and drop versus 13 of its 16 major peers.
The decline is boosting core inflation in Japan, which rose to 1.2 percent in November, the fastest pace since 2008. The rate climbed above its euro-area equivalent in October, and the U.S. gauge has fallen to within 0.5 percentage point of Japan’s as the euro and dollar strengthened.
While Japan has “no other option but to print” money, the downside is a disinflationary impulse elsewhere, according to Albert Edwards, a London-based strategist at SocGen. It’s the West’s “Achilles’ heel,” he told a conference in Britain’s capital last week.
In the past two years, major economies deploying easier monetary policy, such as Japan, have generated only a temporary pickup in inflation, according to HSBC. Those refraining from aggressive stimulus, such as the euro area, have faced even softer price pressures than analysts anticipated, the bank said.
Although declining costs for everything from transport and food to shoes can be good news for consumers, disinflation -- or slowing inflation -- makes it harder for borrowers to pay off debts and businesses to boost profits. Under deflation, or falling prices, households may postpone purchases and companies may delay investment and hiring as demand for their products dries up.
Japan, the largest economy after the U.S. and China, has the strongest trade links with those nations and with Europe, according to the Japan External Trade Organization. The value of exports to China was $118 billion last year through November, while goods shipped to the U.S. totaled $122 billion.
“The international nature of the inflation surprise and the apparent contribution of internationally tradable goods suggest a global explanation,” Michael Gavin, a New York-based market strategist at Barclays, wrote in a note Jan. 7. “The very large yen depreciation that began in 2012 is the most plausible candidate, and it seems likely that it has played an important role.”
Abenomics, which will be discussed by a panel on “the reshaping of Japan” at a session in Davos tomorrow, is showing increasing signs of success at home, boosting the Topix (TPX) stock index by more than 50 percent since Abe took office and stoking inflation expectations.
Japan’s five-year break-even rate, a gauge of anticipated price increases derived from the yield gap between nominal and index-linked bonds, climbed as high as 1.85 percentage points today, from 1.67 at the end of last year. It reached 1.89 in May, the most since at least 2009.
The Asian country’s monetary policy isn’t aimed at exchange rates and is understood by other Group of 20 developed nations, Economy Minister Akira Amari, who’s also attending events in Davos, said Jan. 10.
“If the country is allowed to nurse itself back to health, the world should benefit,” Stephen Jen, a partner at London-based hedge fund SLJ Macro Partners LLP and former IMF official, said in a Jan. 17 phone interview. “You can argue that, by making the Japanese yen weak, it takes output from other countries. But that’s not a complete story. Does the world really want a Japan that stays in depression, or a healthy Japan?”
U.S. consumer prices rose 1.5 percent in December from a year ago, almost a full percentage point below the average over the past 10 years. The price of imports from Japan fell 3.4 percent from the previous year.
Adding to pressure on inflation is a drop in prices of goods from metals to energy products. The Standard & Poor’s GSCI Index (SPGSCI) of 24 commodities declined 6.7 percent in the past year.
Consumer prices in Group of 10 nations climbed an average 1.49 percent last year, the least since 2010, compared with a rate of 1.84 percent in 2012 and 2.54 percent in 2011. The inflation rate will quicken to 1.62 percent this year, according to the median forecast of economists in a Bloomberg survey. That’s still below the 1.92 percent average for the past decade.
While few countries have complained about Japan’s policy, that may change if deflation becomes more of a risk elsewhere, triggering a fresh round of currency wars, or competitive devaluation through interest-rate cuts.
“At the moment, it may not seem to be a problem because everyone has their turn,” said HSBC’s Bloom. “The desperation to weaken currencies at the same time is not there, thanks to the recovery.”
The lack of inflation leaves central banks leaning toward continued stimulus all the same. While the Federal Reserve is tapering its monthly bond purchases, its officials have pledged to keep interest rates near zero. The Swiss National Bank is maintaining a ceiling on the franc, and Commerzbank AG and Morgan Stanley strategists predict the European Central Bank will cut its benchmark rate from a record 0.25 percent.
Lew said last week that U.S. officials “have kept an eye” on Japan to ensure it’s sticking by the G-20’s rule that stimulus be used only for domestic purposes.
“You could say that Japan is clearly doing what’s right for Japan,” Laura Tyson, a Davos delegate and professor at the Haas Business School at the University of California, Berkeley, said by phone Jan. 15. “It could argue its policies are aimed at its domestic economy and that it’s for others to address any spillovers.”
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