Shinzo Abe's monetary stimulus risks inflaming regional tensions

Reaction to the Japanese central bank's stunning monetary stimulus - doubling the size of money in circulation in two years - ranges from "brave" to "irresponsible". It is a bold attempt to jolt Japan out of two lost decades of stagnation and deflation. But it comes with risks that have aroused grave misgivings, especially in China, about the dangers of a currency war, with competitive devaluations aimed at protecting exports, and of asset bubbles forming as a flood of Japanese liquidity finds its way into other markets.

The Japanese yen, which had weakened considerably in anticipation, plunged to a three-and-a-half-year low against the dollar, boosting exports and setting the stage for a revival of a carry trade in yen for investment in overseas assets.

Long under pressure from the US and other countries to allow the yuan to rise, China has allowed its currency to reach its highest level against the US dollar for 19 years, within a narrow trading band fixed by the central bank. A flow of hot money into its fragile financial markets could put it under pressure to hold the yuan down.

Economies like Indonesia, South Korea, Malaysia and Thailand are vulnerable to a falling yen, which could especially hurt South Korea's exporters.

Tasked with meeting Prime Minister Shinzo Abe's inflation target of 2 per cent, Bank of Japan governor Haruhiko Kuroda has taken policy into uncharted territory in a bid to shift inflation expectations and restart robust growth, after the repeated failure of incremental quantitative easing.

If the move succeeds, it will restore Japan as an engine of global growth when American growth has slowed and Europe's has stalled. But, bold and risky as it is, the new package of stimulatory measures is the relatively easy part.