For many years, the only economic story that has really mattered in Asia has been China. The motor of regional growth for a decade or more, it has year after year been the single most critical factor in determining the temperature of the Asian – even the global – economy. But this year, China is in for a run for its money. For the first time in as long as almost anyone can remember, there is perhaps even more interest in how Japan’s economy will fare.
Japan is in the throes of a radical experiment in monetary policy, so bold it has been given a fancy new name: quantitative and qualitative easing, or QQE. This is the year when we will find out whether it works. Three possibilities exist. The first is that QQE, which calls for doubling the monetary base in two years, could fizzle out. Inflation would then sag back towards zero. Possibility two is graver still; the danger that Abenomics – named after Shinzo Abe, prime minister – will slip into “Abegeddon”. Inflation would run out of control, interest rates surge and capital flee. Possibility three is – wait for it – that QQE actually works. If that were to happen, Japan would move towards sustainable inflation of 2 per cent and growth might be 1.5 per cent.
In a recent note, HSBC’s Frederic Neumann says the two recent engines of Asian growth – cheap money supplied by the US Federal Reserve and fast Chinese expansion – are both sputtering. “But there is a third force . . . that will exert greater influence over the region in 2014 than it has for many years: Japan.”