Thursday’s announcement by the Bank of Japan to deepen its aggressive economy stimulus plan was a sensation for the markets. George Soros called the move “a very daring undertaking,” anticipating capital flight as the yen falls.
Adopting a plan against deflation was the first thing the bank’s newly appointed Governor Haruhiko Kuroda did in his new post. The BoJ said on Thursday that it hopes the new monetary policy will “lead Japan’s economy to overcome deflation that has lasted nearly 15 years.” Kuroda unveiled the plan to double government bonds to 30 percent of Japan’s GDP by the end of 2014.
Billionaire George Soros in an interview with CNBC said the BoJ’s aggressive monetary easing may cause “an avalanche” in the yen, which will be hard to control, as the Japanese will likely move their money elsewhere, expecting a steady decline of their domestic currency. The investor believes that under such circumstances massive capital flight is inevitable.
“What Japan is doing is actually quite dangerous because they’re doing it after 25 years of just simply accumulating deficits and not getting the economy going,” Soros said in Hong Kong. “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche.”
BoJ’s plan to buy 7 trillion yen ($74 billion) of bonds every month brought turmoil to the markets. As a result the yen lost 2.5% against the dollar, at 95.40 yen, marking the steepest drop since October 2011, the last time Japan purposely downgraded its currency. The yen has slipped almost 21% since November. Currency strategists expect it could drop to 100-110 yen per dollar area by the end of this year.
"Nobody believed Kuroda would have the courage to do what he did," he said. "The amount of quantitative easing that he's introducing is the same as in the United States, but Japan is only one-third the size. So it's three time more powerful than what's happening in the US…I'm not sure that [Kuroda] is going to be able to create inflation and I'm really not quite certain that he will be able to stimulate the economy," Soros added. “We've been through two decades of – for lack of a better term – depression in Japan and the mere attempt to do so, may not succeed."
Abenomics - a dangerous bend
Shortly after taking office in December 2012, Japanese Prime Minister Shinzo Abe, who previously served as Prime Minister from 2006 to 2007, announced plans to amend the state’s economic policy to drag the country out of two decades of deflation. Over the years all government attempts to stimulate the economy have failed.
Abe's plan dubbed "Abenomics” is aimed to stimulate the economy
through a series of radical monetary, fiscal, and structural
reforms aimed at spurring inflation.
In January the government has doubled its inflation target to 2%.
The plan presumes that the weaker yen will help companies that
produce in Japan to boost exports.
The Bank of Japan’s Thursday announcement on the aggressive monetary easing, meant to raise asset prices and depress interest rates, proves the government is ready to commit to quite dangerous measures in a bid to stimulate economy.
Within the plan the government also aims to create 600,000 jobs in just two years.
"The previous approach of incremental easing wasn't enough to pull Japan out of deflation and achieve 2% inflation in two years," Kuroda said on Thursday, confirming that the country needs more drastic stimulus measures.