The spoils of currency war are shrinking for Japan.
That was the message from the country's second-quarter gross domestic product (GDP) figures, released on August 17. Output shrank by an annualised 1.6 per cent, down sharply from the 4.5 per cent expansion between January and March. The loss of momentum was largely due to poor exports, which dropped 16.5 per cent. More worryingly, the slowdown occurred even though the yen was two per cent lower against the US dollar than in the previous three months. The cheap currency is losing its power to stimulate the economy.
The latest reversal will add to the clamour for the Bank of Japan (BOJ) to ease monetary policy again. It's doubtful, however, if more money-printing would be helpful if all it does is further weaken the exchange rate. Inflation is close to zero, far short of the BOJ's two per cent goal. Wages fell in June, and household consumption swooned in the most recent quarter after recovering only partially from the slump caused by Japan's sales tax hike in April 2014.
Things aren't going much better for the BOJ. Governor Haruhiko Kuroda may find it hard to convince other policymakers on the monetary policy committee that increasing the central bank's already-massive 80 trillion yen ($640 billion) annual bond-buying target would lift inflation expectations without making the government debt market completely dysfunctional.
An additional worry has cropped up over the past week. If China allows the yuan to decline further against the US dollar, Japanese exporters might end up losing some of the competitive advantage they have gained from a cheaper yen. That in turn might provoke Tokyo's currency warriors to fire another salvo. Though after the latest GDP report, it's increasingly uncertain that a bigger offensive would mean a more sizeable economic bounty.
That was the message from the country's second-quarter gross domestic product (GDP) figures, released on August 17. Output shrank by an annualised 1.6 per cent, down sharply from the 4.5 per cent expansion between January and March. The loss of momentum was largely due to poor exports, which dropped 16.5 per cent. More worryingly, the slowdown occurred even though the yen was two per cent lower against the US dollar than in the previous three months. The cheap currency is losing its power to stimulate the economy.
The latest reversal will add to the clamour for the Bank of Japan (BOJ) to ease monetary policy again. It's doubtful, however, if more money-printing would be helpful if all it does is further weaken the exchange rate. Inflation is close to zero, far short of the BOJ's two per cent goal. Wages fell in June, and household consumption swooned in the most recent quarter after recovering only partially from the slump caused by Japan's sales tax hike in April 2014.
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The yen has lost 31 per cent of its value against the US dollar since Prime Minister Shinzo Abe started his "Abenomics" experiment in December 2012, and yet the economy remains fragile. Though the stock market is up 31 per cent over the past year, companies aren't investing in new factories in Japan. Private investment sentiment is weak, and a quick revival appears unlikely. Abe's economic reforms have taken a back seat to his vigorous campaign to change Japan's pacifist constitution.
Things aren't going much better for the BOJ. Governor Haruhiko Kuroda may find it hard to convince other policymakers on the monetary policy committee that increasing the central bank's already-massive 80 trillion yen ($640 billion) annual bond-buying target would lift inflation expectations without making the government debt market completely dysfunctional.
An additional worry has cropped up over the past week. If China allows the yuan to decline further against the US dollar, Japanese exporters might end up losing some of the competitive advantage they have gained from a cheaper yen. That in turn might provoke Tokyo's currency warriors to fire another salvo. Though after the latest GDP report, it's increasingly uncertain that a bigger offensive would mean a more sizeable economic bounty.