The Shinzo Abe era will herald a spectacular decline in the yen. The promise by Japan's newly elected Prime Minister to end the country's chronic deflation spells curtains for the half-hearted quantitative easing that has been the Bank of Japan's hallmark for more than a decade. At some point in 2013, one U.S. dollar will buy 100 yen or more.
Since 1997, the BOJ has expanded Japan's monetary base from 10 per cent to 27 per cent of GDP. Yet it has failed to convince markets that it would tolerate a sustained rise in prices. The election changes that. Investors will soon realize that the BOJ has become as reckless a money printer as the U.S. Federal Reserve has been under chairman Ben Bernanke.
The yen had already started its slide during the campaign, as opinion polls predicted a resounding Abe victory. Nevertheless, a three-digit yen still represents a near-20-per-cent swing from pre-election levels. The last time the currency's value changed so dramatically was in the 15 months following the collapse of Lehman Brothers. Back then, the yen strengthened as the financial crisis and Europe's sovereign-debt woes boosted Japan's status as a safe haven.
Mr. Abe's strategy will be to ratchet up deficit-financed construction spending, with the central bank buying a big chunk of government-issued debt from the market. He has also talked about lifting the BOJ's inflation target from 1 per cent to 3 per cent – though his Liberal Democratic Party's manifesto promised a 2-per-cent goal.
Confirmation of the shift will come in April, when Mr. Abe replaces departing Bank of Japan governor Masaaki Shirakawa with someone more comfortable with at least five years of 3 per cent inflation, required to return prices to their 1998 levels. Then, after the summer of 2013, when the LDP gains control of the upper chamber of parliament, Mr. Abe will introduce a bill that will allow the BOJ to buy foreign securities – a job currently reserved for the finance ministry. That will make Japan's currency intervention more powerful.
Timing is on Mr. Abe's side. Unless the U.S. economy jumps off the fiscal cliff, the Federal Reserve is unlikely to unveil any new easing measures in 2013. One strong push from Mr. Abe, and the yen will tumble.