Shinzo Abe's policies in Japan may impact India.

MUMBAI: The planned monetary and fiscal easing in Japan being steered by the new Japanese Prime Minister, Shinzo Abe, may well have an impact in India by discouraging the yen carry trade which helped fuel capital flows into the country over the past few years.

This is because the Abe-led regime's broad strategy to counter the prolonged deflationary spiral could end up raising nominal interest rates that will put an end to the carry trade, says Heizo Takenaka, a former Cabinet minister and director, global security research institute, Keio University, Japan.

Carry trade involves borrowing at low interest rates and investing in assets that offer higher returns. With Japanese interest rates at historic lows, investors borrowed in yen, swapped to US dollars and then bought stocks, boosting gains. With the Japanese currency weakening, the impact on carry trade for India could be severe with lower inflows.

Abenomics, as the Japanese PM's economic approach or philosophy has been christened, involves a combination of monetary easing, targeting an inflation of 2%, a flexible fiscal policy marked by higher spending in the short run and fiscal consolidation in the long term besides a growth strategy.

Takenaka, who was a minister in charge of financial services, said in an interview in Mumbai that the yen is not a safe currency as perceived given Japan's high deficit and low growth rate. Japan's competitiveness, he explained, can be explained by the yen's appreciation against the US dollar and the Korean won in recent years. Most of the weakness can be explained by the exchange rate, he said. But at the same time, the yen could have a free fall if monetary expansion takes place and commensurately fiscal consolidation doesn't take place, he warned.

Takenaka said after the Koizumi era, the reforms momentum was lost. But he believes it is not hard to revive Japan's economy, and the past couple of decades were a mixed one and not a lost one for Japan.

Takenaka said he was nudging the prime minister to amend laws to improve corporate governance practices in Japan — often criticised for being one of the weakest in developed countries. "We need a strong political leadership for that," he added.


Source : economictimes.indiatimes.com