Japan declared a surprise central bank meeting today, in response to crushing deflation and a strengthening Yen.
Japanese exporters rallied on the news, hoping for action against a strong Yen. Check out the dollar/yen move in response to the emergency meeting news:
Basically, expect Japan to throw more money at its banks and prod them to blow it on something.
WSJ: With its key policy rate already at a rock-bottom level of 0.1%, the BOJ has few options to consider.
One is to implement a quantitative easing plan to inject additional liquidity into the financial system, possibly through the purchase of Japanese government bonds. But members have been reluctant to take that step, because it reduces the bank’s options if the economy weakens further, and such steps are believed to have contributed to the global financial crisis.
It’s a sad story, Japan. Rather than focusing on effective allocation of capital, fanatical support for exporters has created perverse economic policies and massive debt.
Japan should just let deflation happen and learn to be less dependent on exports, instead focusing on efficient use of capital. Ride market forces, don’t fight them. For example, a strong yen means that foreign assets are suddenly cheaper for Japan to own or use, which means higher potential domestic returns from cheaper foreign inputs into production. Imports aren’t bad if you earn more value off of them and a strong currency doesn’t have to be feared.
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