Saturday 11 May 2013

CURRENCY WARS AND THE YEN

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AS YEN HITS 100 TO US$, GET READY FOR MORE CURRENCY WARS

Vivek Kaul

Firstpost, May 11, 2013

Ushinawareta Nijūnen, or the period of two lost decades for Japan (from 1990 to 2010), might finally be coming to an end. Or so it seems.

And Japan has to thank Abenomics unleashed by its current Prime Minister Shinzo Abe for it. Abe has more or less bullied the Bank of Japan, the Japanese central bank, to go on an unlimited money printing spree, until it manages to create an inflation of 2 percent.

Japanese money supply is set to double over a two-year period. And all this 'new' money that is being pumped into the financial system will chase an almost similar number of goods and services, and thus drive up their prices. Or so the hope is. The target is to create an inflation of 2 percent and get people spending money again. When prices are rising or are expected to rise, people tend to buy stuff, because they don't want to pay a higher price later (This, of course, is true to a certain level of inflation and doesn't hold in the Indian case where retail inflation is greater than 10 percent). As people go out and shop, it helps businesses and in turn the overall economy.

In an environment where prices are stagnant or falling, as has been the case with Japan for a while now, people tend to postpone purchases in the hope of getting a better deal. The situation where prices are falling is referred to as deflation.

In 2012, the average inflation in Japan was zero percent, which meant that prices neither rose nor fell. In fact, in each of the three years for the period between 2009 and 2011, prices fell on the whole. This has led people to postpone their consumption and hence had a severe impact on Japanese economic growth. To break this "deflationary trap", Shinzo Abe and the Bank of Japan have decided to go on an almost unlimited money printing spree.

(...) [article here]

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