Abenomics and the Currency depreciation: A lesson for India

November 29, 2013 | Posted by bobbysrinivasan << back to blog

To get the Japanese economy, which has been in deep slumber since 1989, back on track of growth, Prime Minister Abe suggested aggressive monetary easing. It is believed that 100 trillion yen has been pumped into the economy since mid Nov 2012 when he assumed office. This has had a dramatic impact on the value of yen. The yen weakened against the dollar from a level of 78 to a dollar to 100 to a dollar. It also weakened at least by one fifth against their trading partners currencies. The question now is whether devaluation necessarily mean improved exports and reduced imports. Higher exports and profits would mean more funds for hiring, higher wages and capital investment. As per the general rule of thumb, historically a 10% depreciation of yen contributed, 0.3% increase in the Japanese GDP. But things are different this time. Since the Japanese earthquake of March 2011, the nuclear capacity has been closed and so the import bill of liquefied gas, a substitute has more than doubled. As its consequence the trade deficit has increased significantly. Japan’s net outward foreign direct investment stood at 122 billion in 2012 and is likely to increase. More significantly investment in non-manufacturing sectors like mining, retail and communications have increased. Their profit margins are as not as high as manufacturing. Therefore Japan currently is not excited about increased investment internally. Experts believe that 100 yen to the dollar is just optimal. The currency is weak enough to pull up the Japanese economy and strong enough to prevent import costs really hurting. Should India be following a similar course of action to restrict imports and to boost exports to improve our economic growth rate, is a moot question?

We need to wait for the latest data on trade. Mr. Montek Singh is very upbeat about bringing the CAD to 2.6-2.8 percent of GDP. Mr. Chidambaram has promised to bring down the CAD to 60-70 bln $ as against $ 88 billion in FY 13. If it happens, it is good news for the rupee which will stabilize at this level.

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