Why Japan’s ‘Solution’ is Win-Lose – and In the End, Lose-Lose

By Shlomo  Maital  


In his Foreign Policy blog, my friend Clyde Prestowitz [President Reagan’s chief trade negotiator and an expert on Japan]  draws attention to Central Bank of Japan Governor Kuroda’s drastic new policy:

   [Kuroda]  and the bank are going for broke by buying as much government debt as necessary to create an inflation rate of 2 percent. The initial move will have the BOJ buying twice as much as the U.S. Federal Reserve has been buying in its quantitative easing campaign to get the U.S. unemployment rate down to 6.5 percent. But the BOJ has also promised to go far beyond even this uncharted territory if necessary to get to the targeted 2 percent inflation rate. The major question now is whether this will work or whether the country will just wind up broke.    Already the move has pushed the value of the yen against the dollar down from Y76/$ to Y96/$ for a devaluation of a little more than 25 percent over the past few weeks.

 Great news when the world’s 3rd largest economy (it lost #2 to China) gets its motor running again?   Perhaps.  But there is a catch.  When Japan devalues its currency to boost exports, somebody loses THEIR exports, because THEIR currency gets more expensive.  What if EVERY nation tried this?  We’d be back in the 1930’s, when competitive devaluations destroyed world trade.

   Job creation is the chronic disease left in the wake of the 2008-12 global financial crisis.  Many governments are trying to export their unemployment, like Japan.  This is short-term win-lose, which ultimately becomes lose-lose when every nation tries it.  The only solution is to spur trade with a globally coordinated policy, win-win. 

    Is what Japan is doing LEGAL, according to free trade agreements? It is indeed.  Those agreements,  Prestowitz notes (and he should know) do NOT deal with currency fluctuations. This is a huge loophole that Japan is driving its truck through.