Monetary easing the wrong cure for Japan's deflation
Andy Xie says Bank of Japan's aggressive move will spur speculation and risk the yen's collapse
The Bank of Japan shocked the market with its aggressive bond-buying programme aimed at achieving 2 per cent inflation in two years.
Inflation generally lags behind a loose monetary policy by one to two years. With a declining population and labour force, and a median working age of 45 and rising, the lag will be even longer in Japan.
But if the central bank is anxious to see results soon, as it appears to be, and keeps escalating its "quantitative easing", it may cause panic among Japanese financial institutions and savers. When that happens, the yen's value will collapse, like the Russian ruble did in 1998.
This is what foreign speculators are waiting for. They will close their short positions, buying yen at very low levels. If Japan goes down that path, it will be taken to the cleaners by the speculators.
As I have argued before, yen depreciation is necessary to solve Japan's deflation. Over a five-year time frame, the yen could reach 150 against the dollar.
This forecast is based on Japan's deteriorating trade account, which in turn reflects its declining competitiveness. When the yen's value is in line with Japan's competitiveness, its deflation will end. In such a framework, the yen's decline would be gradual.