By: Mike Campbell
To nobody’s particular surprise, the Bank of Japan decided to hold its interest rate at 0.1% where it has stood since January 2009. The Bank characterised the Japanese recovery as “moderate” during last Friday’s meeting. The Bank is obviously cognizant with the on-going Euro crisis.
The Euro has fallen to a low against the Yen not seen for more than 8 years. At the end of yesterday’s trading session, the Euro was buying 109.53: at the height of its appreciation against the Yen in July 2008, it was trading above 169 Yen to the Euro. Japan is an exporting nation and the Eurozone countries represent a significant trading partner.
Since the start of 2010, the Yen has appreciated by more than 16% against the single European currency, making Eurozone imports cheaper and exports to Europe more costly. Japan has very substantial debt problems of its own and unemployment stands at 5%; the highest level since World War 2. Domestic demand is subdued because of deflationary pressure in the economy and concerns over job security. Since the globalisation of the world economy, a problem in one major trading area is bound to have consequences elsewhere in the system.
Italy joined the ranks of Eurozone countries to announce austerity measures yesterday with plans to reduce their spending by €24 billion over the next two years. The money will be saved by freezing public sector employment and public sector pay cuts. Public sector pensions and local government spending are also likely targets. The moves are likely to be highly unpopular with Italians. There is a Europe-wide disconnect between government debt problems and the citizens feeling any responsibility for them (although the money was spent in their name); consequently they are angry at having to pay for what they perceive as their government’s mistakes.