China worries push Japan into negative interest rates
KUWAIT: The bank of Japan surprised the global financial markets by taking interest rates into negative territories. The official rate now stands at minus -0.1 percent. The surprise action was so powerful that it immediately lead to a surge in global equity and bond markets and a weakness of 2 percent in the Japanese yen against the US dollar. It seems that most central banks around the world are worried about what is happening in China and mostly worried about the Chinese central bank devaluing the Yuan. Some are talking about a global economic slowdown in the coming months. Even the US economy is showing signs of fatigue. US gross domestic product for the last quarter of 2015 has slowed down sharply to an annualized rate of just 0.7 percent, as tumbling oil prices and weak exports mostly hit by surging dollar held back economic growth.
The surprise action by the bank of Japan proves the point that global inflation is no longer a threat and the risk of global deflation is a big risk. The main global deflationary risk could come from China. China is very good at exporting cheap goods and for them exporting deflation through even cheaper exports is not a problem. Also this action by the bank of Japan
could ignite global competitive currency devaluation.
Can Japan succeed in coming out of the deflationary spiral?
Japan will ultimately come out of the vicious deflationary slump only when the Yen is allowed to weaken a lot. ?One of the main external cause of Japanese deflation has been the continues foreign direct investment in China. Domestically Japan has an excess of domestic supply capacity that has been another cause of the internal deflation. A devaluation of the Yen is way over due and should lead to a reduction of both sources of deflation and unfortunately will lead to a much bigger problem and that is a global deflation. The Japanese old grave system of savings by the public and the private has to be dismantled if Japan ever needs to get out of the deflationary circles. A devalued Yen will temporarily create inflation and a boom in exports but a deflation will come back if the domestic savings carry on piling up.
Because of the staggering foreign direct investments in China over the past decades and Japanese direct investments throughout the world in particular Japanese producers of exportable goods whose direct investments, driven by the strong yen, are having the most deflationary impact on the global economy. As long as the Yen stays strong this keeps their domestic operating costs prohibitively high relative to China and other countries in Asia such as Thailand that has attracted billions of dollars of Japanese direct investments. A more important source of a deflationary threat around the world is the overcapacity and excess supply of produced goods. Globally, every economy that relies on manufacturing industry is exporting its excess supply to one another. The global economy needs consumptions rather than productions or lets say inflation. The weakness of the Japanese Yen and the Chinese Yuan has already forced central banks around the world to cut interest rates in the hope of devaluing their currencies. — Rasameel