Blog Post

Will Europe pay for Japan?

As the Bank of Japan is rolling out its new programme of quantitative easing, a significant debate about the impact on Europe is emerging. Is Japan engaging in a “beggar-thy-neighbour” policy? Is Europe paying the price as other central banks are responding? Jean-Claude Juncker has already announced that the euro is overvalued while Jens Weidmann sees global central bank independence endangered. Let’s first look at the facts.

By: Date: January 28, 2013 Topic: Global economy and trade

As the Bank of Japan is rolling out its new programme of quantitative easing, a significant debate about the impact on Europe is emerging. Is Japan engaging in a “beggar-thy-neighbour” policy? Is Europe paying the price as other central banks are responding? Jean-Claude Juncker has already announced that the euro is overvalued while Jens Weidmann sees global central bank independence endangered. At the same time, Yasutoshi Nishimura, Japan’s deputy finance minister, already stated that Europe is in no position to criticise. Let’s first look at the facts.

Since the election of Prime Minister Shinzo Abe on 26 September 2012, the Yen depreciated significantly againt the US Dollar as well against the Pound Sterling and the Euro. However, the difference between the euro and the two other considered currencies is striking: The depreciation against the euro amounts to 20% while it depreciated by only around 14% against the US Dollar and the Pound Sterling.

So is Europe becoming the main variable of adjustment to reduce Japan’s current account deficit? A number of arguments are relevant in this context. First, Japan trades more with the US than with the Euro area. A smaller exchange rate adjustment may therefore still mean a larger current account adjustment. Second, as my colleague Zsolt Darvas is pointing out on this blog, the recent Japanese exchange rate movements only correct the value of the Yen to its long-run trend. Third, the recent strength of the euro appears to reflect a renewed confidence in the financial markets in the ability of the euro area to resolve its crisis. It is not related to any new monetary policy decisions taken in the euro area since the election of Shinzo Abe. Fourth, current forecasts by the European Commission predict an increase in the trade surplus for the euro area while Japan and the US are predicted to have increasing trade deficits.

For Japan, the monetary easing is appropriate. Its monetary policy needs to finally act decisively to counteract the persistent deflation in Japan. Until the monetary actions will lead to a shift in inflation, Japan’s real exchange rate will depreciate allowing for the external adjustment of Japan’s current account deficit. A persistent current account deficit could pose a risk to Japanese debt sustainability and should therefore be avoided.

From the point of view of Japan, it thus seems that a stronger euro is appropriate given the predicted trade surpluses in the Euro area. At the same time, it is clear that a stronger euro will render adjustment in the Euro area more difficult. Overall, these developments suggest that the euro area should not hope to achieve its adjustment by running external current account surpluses. Japan but also the US will want to keep their currencies weak. Europe should avoid a currency war by trying to ease monetary policy by too much. Too easy monetary policy will trigger further monetary policy action not just in Japan but also the US and the UK. Overly abundant global liquidity will then risk compressing yields on risky assets too much thereby laying the foundations for the next bubble. Instead, it is high time that the euro area addresses its domestic demand weakness with the right wage and fiscal policies differentiated appropriately across the area. Europe needs to fix its macro-policies and not rely on the ECB to do everything.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Jan
20
14:00

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read about event
 

Past Event

Past Event

How can we create more sustainable value chains?

There is an urgent need for GVCs to become more resilient and inclusive, and meet the net-zero challenge.

Speakers: Erik Berglöf and Alicia García-Herrero Topic: Global economy and trade, Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 10, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceEuropean Parliament

The New Euro Area Inflation Indicator and Target: The Right Reset?

Testimony to the Monetary Dialogue Preparatory Meeting of the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas Topic: European governance, European Parliament, Macroeconomic policy Date: November 9, 2021
Read article
 

External Publication

European governanceEuropean Parliament

The new euro area inflation indicator and target: the right reset?

In-depth analysis on the European Central Bank's revised inflation target prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas and Catarina Martins Topic: European governance, European Parliament, Macroeconomic policy Date: November 4, 2021
Read about event More on this topic
 

Past Event

Past Event

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke, Francesco Papadia and Massimo Rostagno Topic: Macroeconomic policy Date: November 4, 2021
Read article Download PDF More on this topic
 

Working Paper

Does money growth tell us anything about inflation?

Attention should be paid to a possible sequence of negative events: if inflation would start to be volatile and money growth remains high, efforts to control inflation could be undermined.

By: Leonardo Cadamuro and Francesco Papadia Topic: Macroeconomic policy Date: November 4, 2021
Read article
 

Blog Post

European governance

Is the risk of stagflation real?

Most economic forecasts predict a return, in the medium-term, to pre-pandemic growth and inflation. Nevertheless, the European Central Bank and fiscal authorities need to be vigilant for signs of the contrary.

By: Monika Grzegorczyk, Francesco Papadia and Pauline Weil Topic: European governance, Macroeconomic policy Date: November 2, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read about event More on this topic
 

Past Event

Past Event

Monetary and macroeconomic policies at the crossroads

Bruegel Annual Meetings, Day 2- In this session we would like to discuss monetary and macroeconomic policies after Covid-19.

Speakers: Grégory Claeys, Per Callesen, Gita Gopinath, Jorge Sicilia Serrano and Lawrence H. Summers Topic: Banking and capital markets Location: PALAIS DES ACADEMIES, RUE DUCALE 1 Date: September 2, 2021
Load more posts