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Weiging up Abe's monetary policy

Weiging up Abe's monetary policy

The depreciation of the Japanese yen has become the hottest issue in the international financial markets. Since Shinzo Abe took over as Japan's prime minister at the end of last year and proposed that the country should adopt a more active monetary policy, its currency has dropped 13.16% against the US dollar. The currency was trading against the dollar at 89.78 on Jan. 18, compared with 79.36 on Nov. 13 last year. This trend is contrary to that of a strong yen, which was trading at 121.93 against the dollar on Feb. 13, 2007, but had strengthened to 77.61 against the dollar by Sept. 28, 2012.

The yen's depreciation allowed Japan's manufacturing industry to ease the pressure from a strongly rising currency and helped boost Japan's stock markets due to increasing profits generated in the manufacturing sector.

The Nikkei-225 Stock Average rose 25.1% from 8,644 points on Nov. 14, 2012 to 10,837 points on Jan. 18.

The Bank of Japan reportedly reached an agreement with the Cabinet during the first regular meeting held after Abe took office on Jan. 21 and 22. It was decided that the bank should raise its inflation target from 1% to 2% and should extend its asset purchasing program.

However, this does not mean Japan's long-term deflation can be reversed and that the yen will continue to slip.

For the Bank of Japan, setting up an inflation target is a new idea. Despite longstanding deflationary pressure, until February 2012 the bank had an inflation target of 1% as a major part of its monetary policy. To meet the new target, the central bank will not only continue maintaining its secured overnight call loan rate at an extremely low level of 0%-0.1%, but will also continue expanding its asset purchasing program. Meanwhile, it has also announced credit-easing measures to boost loans for growing industries several times.

Generally speaking, it is unfair to attribute Japan's longstanding deflation and a strong yen to the small scale of the Bank of Japan's monetary policy. In fact, the central bank's policy last year was among the most relaxed in the world. This year, the Bank of Japan plans to buy assets worth 7.6% of the country's GDP, higher than the US plan to buy assets worth 6.3% of its GDP under its third round of quantitative easing.

Although the general public has pinned its hopes on Abe's monetary policy, the People's Bank of China also has to deal with the problem of meeting a 2% inflation target.

The ineffectiveness of Japan's monetary policy has little to do with the level of its inflation target and the size of its asset purchasing program. Therefore, in the next Japanese meeting on monetary policy, in addition to the rise in inflation targets, the observation focus should also be placed on whether the Bank of Japan will change its manipulation model, whether it will extend the deadline for purchasing assets to strengthen its monetary policy and if it will expand the categories of assets it intends to buy, so as to increase support for certain departments.

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