Quick fix with long-term risk in Japan

Japan’s aggressive monetary policy will likely raise the country’s economic growth rate this year, but risks and concerns remain over the longer term, according to a Bank of Korea report yesterday.

The report by officials from the BOK’s Tokyo branch is based on opinions from Japanese economic experts at research institutes and state institutions.

“Japanese experts expect their economy to reach a high growth rate this year, but at the same time they also feel that there are many potential risks involved in the mid- and long-term,” the report said. “Many Japanese economic research institutions expect Japan’s economic growth to reach the 2 percent level this year, but next year economic vitality could be less.”

According to the report, a majority of Japanese economic experts also are aware of the potential risks involved in the direction pushed by Abe.

“There is a concern that with the weakening yen, consumer prices could rise sharply in the case of an increase in consumption tax and oil prices,” it stated. “Also, when Japan starts to see economic recovery, there could be growing conflict between the Japanese government and the Bank of Japan over inflation issues.”

Since late last year after Prime Minister Shinzo Abe took office, the government has introduced various policies to salvage a sinking economy that has suffered from deflation and low growth for years by lowering corporate tax rates and expanding public investment.

Earlier this year, the Bank of Japan proposed a target inflation rate of 2 percent in two years. On April 4, as a follow-up, it announced it will double its monetary base in two years and purchase bonds as part of quantitative easing measures. Such expansive monetary measures will be maintained, the BOJ said yesterday.

“With its expansionary policy, which has been followed by a gradual recovery in the global economy, Japanese shares, currency and bond prices have risen sharply, and company profits have surged,” the report said. “Exports also have increased and consumer sentiment has improved.”

The yen and Japan’s benchmark index have risen 20 percent and 50 percent, respectively, since November. The yield for 10-year bonds also has dropped to the 0.4 and 0.5 percent level.

With the weakened yen, Japanese corporations are experiencing profit growth overseas as their products are more price-competitive in the global market compared to their rivals, including Korean firms.

By Lee Eun-joo [angie@joongang.co.kr]