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Commentary: Japan's aggressive QE raises specter of currency wars

English.news.cn   2013-01-22 16:30:11            

by Deng Yushan

BEIJING, Jan. 22 (Xinhua) -- Japan's central bank on Tuesday officially boarded the roaring train of what is dubbed Abenomics, stamping harder on the monetary accelerator pedal in a bid to jerk the bogged-down economy back into motion.

Albeit understandable, Tokyo's decision to crank up money printing presses is dangerous. Such a beggar-thy-neighbor practice is likely to force others to follow suit and thus push the world ever closer to currency wars.

Whether bowing to government pressure or not, the Bank of Japan (BoJ) wrapped up its two-day policy meeting with the introduction of the 2-percent inflation target Prime Minister Shinzo Abe has been shooting for and an open-ended commitment to asset-buying from next year.

The measures signaled a dramatic change in the central bank's modus operandi. But given Japan's seemingly perpetual economic slump under the curse of deflation, the BoJ has a handful of plausible reasons to resort to more and bolder quantitative easing (QE). Many are beating the drum for the idea that Japan inflates its way out of the current doldrums.

Yet should history be any indicator, the effectiveness of Japan's colossal cash dose is questionable. The previous 10 rounds of monetary easing in recent memory have failed to spark new life into the world's third largest economy.

What is unquestionable is its potential perilousness. On the domestic front, to the accompaniment of session after session of liquidity infusion, Japan's debt has snowballed to more than double the size of its GDP -- a staggering ratio that dwarfs those of its industrialized peers.

Some argue that Japan's debt is of no big concern thanks to the overwhelmingly domestic ownership. But exorbitant monetary easing and public spending might eventually sap the public's faith in the government's debt control ability, pushing up yields and setting off a vicious spiral. Loss of confidence could be abrupt and self-reinforcing.

From a global perspective, the auguries are even more ominous. The easing of Japan's monetary policy entails the weakening of its currency, a side effect -- if not the purposeful design -- that can translate into an artificial and unfair price advantage for Japanese exports.

It is a safe bet that others would respond with driving their own currencies down, thus igniting a downward race among the world's most heavily traded media of exchange -- known in a more dreadful way as currency wars.

An outbreak of such competitive devaluations, which would trigger cross-border trade hostilities and undermine global cooperation, is the last thing the world economy needs to keep its wobbly recovery on track.

Also, at a time when experimental medications like QE have turned into over-the-counter drugs for sickly economies -- from the United States to the European Union to Japan, massive excess liquidity is sloshing around in global markets, posing a risk of asset bubbles.

Given today's deep-going globalization and Japan's economic heft, a healthy Japanese economy benefits the whole world. But as has been demonstrated repeatedly, cash injection is not the cure -- not to mention a cure-all -- for the Asian power's economic malaise.

As placebo is no substitute for proper treatment, monetary easing can not replace the more politically difficult decisions Japan has to make to put its economy back on a solid footing, including implementing structural reforms and strengthening fiscal discipline.

Either it chooses to stand up to the daunting challenges, or it might be forced to.

Editor: Zhu Ningzhu
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