April 5, 2013

Japan to pour money into its financial system

The devalued yen will make Japanese goods less costly in the United States.

The Associated Press

TOKYO — Japan is taking aggressive action to lift consumer prices, encourage borrowing and help pull the world's third-largest economy out of a long slump.

Haruhiko Kuroda
click image to enlarge

Bank of Japan Gov. Haruhiko Kuroda, right, speaks at a news conference at Japan’s central bank headquarters in Tokyo on Thursday. Japan is making a sweeping shift in its monetary policy, aiming to spur inflation.

The Associated Press

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Like the U.S. Federal Reserve, Japan's central bank plans to flood its financial system with more money – its most far-reaching step to date to get consumers and companies to borrow and spend.

The Bank of Japan's action will also drive down the value of the yen. A cheaper currency will make Japanese goods – from Toyota cars to Sony TVs – less costly for Americans and other foreigners. And it will make U.S. and other exports more expensive in Japan.

The move comes as major central banks around the world are acting to stimulate their economies. On Thursday, European Central Bank President Mario Draghi said the ECB is considering doing more to shore up the ailing economy of the euro alliance. The ECB left its benchmark interest rate unchanged at 0.75 percent, but Draghi said an interest rate cut was discussed Thursday.

Draghi also said the central bank is considering "various tools" beyond lower rates in case Europe's economy needs more help.

And the U.S. Fed has said it expects to keep short-term rates at record lows at least until unemployment falls to 6.5 percent from the current 7.7 percent. The Fed also plans to continue buying $85 billion a month in bonds indefinitely to keep long-term borrowing costs down.

"The central banks are being more activist than we've seen in decades," said Timothy Duy, an economist at the University of Oregon. "One central bank after another has to do more because economies aren't improving as fast as would have been expected."

Dan Akerson, CEO of General Motors, told CNBC he feared the Bank of Japan's policies would give Japanese automakers a price advantage over GM in the United States.

"They're an export economy," Akerson said. "You have to be suspicious of what they're doing and why."

But many economists say the rest of the world will benefit, too: A faster-growing Japan will buy more products and services from the United States, China and Europe, helping boost their economies.

Japan's economy has been sputtering for two decades. Last year, weak consumer spending kept prices and inflation flat.

Eswar Prasad, an economist at Cornell University, cautioned that Japan needs more than easy-money policies to repair its economy. It needs to reduce its debts and reform policies that protect weak firms from competition and undercut the country's productivity.

"Japan would no longer be a drag on the global economic recovery if it had stronger domestic demand and positive inflation," Prasad said. "However, it is far from clear that the Bank of Japan's actions will be able to deliver these positive outcomes in the absence of broader structural reforms that are essential to revive Japan's productivity and competitiveness."

 

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