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Banking

Shinzo Abe faces up to his toughest battle

Prime minister Shinzo Abe’s radical policies have lifted Japan from its slumber. His supporters say he’s slain the deflation dragon. But what tools can he find to win the next fight – a looming fiscal crisis?

For his debut at Jackson Hole, the new governor of the Bank of Japan chose not to mimic his prime minister by boldly proclaiming "Japan is back!" Perhaps it would have sounded too unseemly for an annual meeting of central bankers and economists. Instead, Haruhiko Kuroda said on August 24: "The Bank’s quantitative and qualitative easing has already started to gradually exert effects."

Shinzo Abe’s punchline would have served much better. There is nothing understated or stumbling about the recovery in Japanese markets since the Abe government took power last December with a pledge to lift the country out of a prolonged slump. The overvalued yen has plummeted, giving a massive boost to beleaguered Japanese exporters, while the Tokyo stock market has gone from global backwater to top performer.

Since mid-November, when investors scented an Abe victory and a new central bank regime that would pursue aggressive monetary easing, the yen has shed about a quarter of its value against the dollar. Indeed, according to Ryutaro Kono, Japan economist at BNP Paribas and a former member of the Bank of Japan’s policy board, the yen’s real effective exchange rate is now the lowest since the 1985 Plaza Accord.

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