Bank of Japan’s (BOJ) assessment to adopt a negative interest rate to encourage borrowing, spending and investment has failed to have the intended effect as the Japanese government continues to accumulate a debt of 233% of GDP in late 2018. Lower interest rates imposed by the BOJ to revive the economy has failed to intensify the domestic spending and growth remain steady with no indication of rapid growth.
Interest rate predictions over the next 40 years (Reference) highlights that japan will continue to have slow growth and predictable levels of inflation and domestic expansion making the Japanese market a low risk economy. Deflation in japan continues following the collapse of the economy during the early 1990’s price bubble burst. The effects of highly inflated stocks and real estate prices due to its uncertainty was a major contributing factor to the world’s largest debt to GDP ratio.
Following economic bubble burst in the early 1990. The government responded by stringent tariffs and policies to encourage the population to save. As a result, short term interest rate targets and low level of government bond yield were used as tools to boost domestic demand and GDP. However, it has clearly become evident that the use of monetary and fiscal policies has had no bearing on reviving the Japanese economy while the debt continues to grow.
The value of the Japanese Yen (JPY) continues to fluctuate as trade war between China and the USA continues to escalate and trade disputes with South Korea adding additional pressure on the currency. On the other hand, the JPY remains the third most traded currency and its ability to operate a current account surplus continues as 1.21 trillion JPY was recorded in June 2019, ensuring Japan’s ability to act as a net lender. Given that, China and the USA are major exports of japan (Reference), conflict in tariffs will ensure consumers seeking alternative markets with comparative advantage to import goods and services from. Which is clearly evident as the JPY has appreciated against the USD and will continue to appreciate in the short run due to consumers seeking cheaper alternatives. However, the value of the JPY is predicted to fall in the long run as the trade war tensions should conclude.
The current account surplus has allowed japan to accumulate foreign assets, job creation in exports sector and high share of output is exported than consumed. Furthermore, weak domestic demand which rose my mere 0.2% in February 2019, reluctance to buy imports and greater competitiveness due to undervalued Japanese Yen continues to produce a current account surplus where the exports exceeds imports. Based on PPP, the Japanese Yen is under valued at $-2.52 against the Australian dollar (reference) allowing the exporters to access goods and services at lower prices due to higher purchasing power.
On the other hand, the current account surplus increases the supply of foreign currencies in the market driving the exchange rate down in the long run, but the low interest rates are driving the demand for the JPY up and therefore for the value is appreciating in the short run.
Political stability has ensured economic stability in Japan where the elected Prime Minister Shinzo Abe in 2013 outlined his audacious set of economic policies to boost growth and bring about inflation. The use of fiscal expansion, monetary easing and government intervention through structural reforms has shown slight economic improvement in Japan. Moderate growth followed by increase in net trade with low level of unemployment continues to improve the current economic environment of Japan. Productivity is to grow by 2.2% by 2020 and the movements in bonds and the currency market japan is perceived as a safe haven by investors in times of economic conflicts in the world.
Despite the world’s largest debt to GDP ratio followed by the slow domestic growth due its decade long deflation, Japan is considered a safe-have given its current account surplus, low level of unemployment and strong Japanese Yen as a direct result of net trade. Political stability in Japan despite current trade conflicts around the world has given investors and consumers cheaper alternatives to exports goods and services with higher purchasing power due to the undervalued JPY. While it is expected for the value of the JPY to drop against the USD in the long run, Japans’ lenience in monetary policy and boost fiscal policies to promote domestic growth and improve inflation will ensure future economic opportunities and prosperity for the domestic and foreign companies.