The slide in the yen slowed in April, after a sharp decline in Q1, but it re-accelarated late last week. Greenshoots of recovery have started to emerge, with improvements in consumption and exports. Yet doubts persist on the likely success of Japan’s radical monetary experiment to rid the economy of deflation. Flooding the financial system with liquidity has seen a revival in equities and confidence, as well as bets on further currency weakness. The IMF, though, warns of potentially disruptive capital flows between countries and of the uncertainty caused by the dangers of an eventual policy correction. In the US semi-annual report on the FX practices of its major trading partners, Tokyo avoided outright criticism of its ‘weak’ exchange rate stance. However, its willingness to see the yen flounder does not bode well for global financial stability and threatens to spur international economic nationalism. FX intervention has, certainly, become a hot topic in nations that have seen exports suffer from a perceived unfair trade advantage. Inflation in Japan is expected to accelerate from in 2014, the latter also reflecting a planned sales tax hike in April of that year. Price increases, though, will exert upward pressure on interest rates and borrowing costs, which could detrimentally affect public finances. It is probably too early to debate possible exit strategies from quantitative easing, as inflation is no where near the 2.0% government target. Yet, as in the case of the US and Europe, unless structural reforms are adopted with a clear policy vision, investor confidence will remain fragile.
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