Unfortunately, Natixis warns, the same error is being repeated by the Bank of Japan. The starting point of their analysis is the contrarian fact that Japan needs a strong yen. Japanese exports are hardly sensitive to their prices; Japan has a large proportion of "necessary" imports (commodities) whose price rises when the yen weakens. Unfortunately, Natixis warns, the Bank of Japan has just increased the size of its quantitative easing program, which will lead to a steeper depreciation of the yen. The only benefit will be a temporary rise in the Nikkei, an automatic result of the conversion of Japanese companies' results into yen. Nothing more...
Via Natixis,
1. Japan needs a strong yen
Japan exports sophisticated, differentiated goods, which explains the low price elasticity of its exports (around 0.1).
Japan’s market share varies very little with the yen (Chart 1): the depreciation since the end of 2012 has not improved this market share.
Furthermore, Japan has a high level of necessary imports, especially commodities (Chart 2).
A depreciation of the yen increases import prices sharply, which reduces wage-earners' purchasing power and consumption (Charts 3A and B).
[11]
A strong yen would therefore be positive for Japan:
• It would hardly reduce Japanese exports;
• It would reduce import prices and stimulate domestic demand significantly.
2. But the Bank of Japan has just increased the size of its quantitative easing
Even though a weak yen plunged Japan into recession (Chart 4), the Bank of Japan has just decided to increase the size of its quantitative easing (Chart 5), which will lead to a further depreciation of the yen (Chart 6) and therefore ultimately worsen the recession.
[12]
Its only positive effect is that it will lead to a rise in the Nikkei in the short term (Chart 7), particularly due to the conversion of Japanese multinationals’ earnings into yen.
It is therefore difficult to understand this policy.
