Much at risk in Asian currency wars
Japan's Prime Minister, Shinzo Abe, told Parliament this week that if the Bank of Japan did not hit a 2 per cent inflation target, then the law would be changed.
While Abe did not spell out what changes he had in mind, it's obvious they would involve a reduction in the central bank's independence with an increase in political intervention.
Since the turn of the century, Japan has, on average, deflated at 0.2 per cent a year. This has occurred despite the central bank's attempts to restore inflation. Money supply is at a significantly higher level than is was prior to the economic bubble of the 1980s, but prices have continued to drift downwards.
The most popular explanation for Japan's stubborn deflation is that its ageing population is anxious about funding retirement. If this is the case, and it sounds plausible, then Abe's strategy of further money easing is unlikely to address the problem.
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