Will Western economies be ‘turning Japanese’ after Covid-19?

Japan has announced a colossal stimulus package (£1.75 trillion) as it attempts to breathe life into its Covid-19 damaged economy. But with its finances already in a parlous state before the pandemic struck, economists and policy makers around the world are nervous about where this dramatic intervention in one of world’s most fiscally conservative nations could lead.

One of the biggest problems Japan could face is its own currency. The Yen has traditionally been a safe haven in times of global uncertainty but not, it appears, right now. A fall of nearly 10 per cent against the dollar was recorded in March, as investors rushed to the world’s most powerful currency. The Yen has only had a marginal recovery since.

Currently, there seem to be fears about what the Abe government’s stimulus could provoke in a country with the largest public debt to GDP ratio in the world. Some officials have warned that a dramatic loosening of fiscal discipline (the package amounts to around 40 per cent of Japan’s GDP) could unleash a run on assets and lead ultimately to a dramatic erosion in the value of the currency, with profound consequences for the economy as a whole.