Macro-economic policies and Japanese new consumption tax – By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

In general, policy action in macroeconomics would fall in to the following three categories:

Category I: This refers to the action policy that brings about a temporary result. An example will be countries intervening in the currency market. Japan and Switzerland are experts in this area. The Japanese Yen which was 260 to a USD in 1985 was rapidly appreciating, affecting their exports. They used to intervene in the market by buying USD and selling Yen to stop its appreciation and reverse the trend. They wasted large amounts of money doing this and the policy impact was very temporary and non-productive. Yen continued to appreciate to 78 to a Dollar last year. Switzerland is currently fighting hard to keep its currency from appreciating and would prefer to have 1.20 to the Euro. So intervention in the currency market has temporary impact but generally becomes wasted energy and money in the long run.

Category II: This action policy involves adjusting the interest rates; say to combat the deflation/inflation. A good example will be the Alan Greenspan interest rate policy to stop the deflation in the early 2000. He masterminded the drop of discount rate from 6% to 1% over a short period of time to arrest deflation that was setting in the US. The effect again was temporary. It did stop the deflationary tendencies but the cheap money went into speculation pushing the US property market by 77% over 5 years. This was followed by the collapse of real estate prices that led to what is known as the sub-prime crisis.

Category III: This refers to the macro-economic policy of pumping the prime through quantitative easing whose effect lingers on and on until the cows come home. An example will be the quantitative easing 1, 2 and 3 (QE1, QE2, QE3), which refers to the action of pumping $2.5 Trillion into the US economy by their federal reserve. This started in 2009 after the beginning of the sub-prime crisis and continues till date.

For the traders in the Forex market, understanding of these categories is of utmost importance. Let us turn our attention to the recently increased consumption tax in Japan.

Japan has recently increased their consumption tax from 5% to 8%. This caused spending on big ticket items such as cars and apartments to dip sharply in the weeks after April 1 2014 when it took effect. Bank of Japan governor Mr. Kuroda is happy about this development. According to last week’s survey of workers in the service industries, confidence in Japan’s economic outlook soared to a record high in April. To get the economy out of deflation which already has lasted 15 years, the Japanese government is pumping the prime to get the inflation about 2%. To do this, Bank of Japan is buying enough bonds and other assets to pump up Japan’s monetary base at an annual pace of about Yen 60 to 70 Trillion ($592 bln-692 bln).

Trade data in Japan showed that imports rose by 3.4% last month about three times higher than expected indicating that the domestic demand is picking up.

In a statement, Bank of Japan noted while the spending had faded in recent weeks, industrial production and investments by businesses continue to improve. We hope that the Japanese macro-economic policy achieves what their government has targeted. In today’s challenging world, every successful macro-economic action adds a weapon to all the countries to deal with their respective situation. Hope India develops some serious macro-economic policies, which will pull us out of this high inflation and low growth scenario.

We just received the information that the SLR is being cut while the repo rate will remain unchanged


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