Is easy money the path to prosperity? That’s what Japan’s trying to find out in 2013, as it embarks under new prime minister Shinzo Abe and his dovish monetary policy; so far, things have gone even better than expected. The NIKKEI 225 (Nikkei Indices:NI225) took a hit this week in losing around 1% over the past five days, but Japan’s leading stock index is up more than 18% year to date. The ongoing Cyprus drama in the eurozone took a whack at markets across Asia, but despite stocks retreating during the past week, many investors are still optimistic about Japan’s bold new direction.
Aggressive money moves has Japan in a groove
With a new chief in at the Bank of Japan, the country’s central bank is set to begin buying up trillions of yen worth of bonds, much as the U.S. Federal Reserve has done with its “QE-infinity” program. Abe’s targeting 2% inflation, as he tries to jump-start an economy that’s stagnated since the ’90s, as deflation has hurt consumer prices, wages, and property prices. Still, the moves have sparked fears of a currency war with other leading economies, as well as risking the stability of Japan’s bond market — in which Japan’s banks are heavily invested — if Abe’s goals fail.
A weaker yen will help drive up import prices as well as boost exports for multinational Japanese companies looking for a leg up on competitors, but it could hurt average Japanese consumers if wages can’t rise fast enough to outpace inflation. It won’t make the international community very happy, either: Asian rival China continues to put pressure on its island neighbor and other nations pursuing weaker monetary policy. China also hasn’t been too happy lately over Japan regarding the Senkaku Islands, claimed by both nations in a dispute that has continued to simmer over recent months.
That dispute has resulted in Japanese carmakers worrying about losing influence in the lucrative Chinese auto market. Toyota Motor Corporation (ADR) (NYSE:TM)’s Chinese sales in January and February fell 13% year over year as the automaker attempts to mitigate its losses from the international row. Outgoing Toyota Motor Corporation (ADR) (NYSE:TM) chairman Fujio Cho expressed his sentiments on Friday that Japan and China need to keep economic exchanges open, even with the political fight, but Toyota Motor Corporation (ADR) (NYSE:TM) will need more than that to overtake rival General Motors Company (NYSE:GM) in the second-largest economy.