In Japan, the quantitative easing introduced in early 2013 initially pushed up asset prices, then drove down domestic demand because of the loss of real income caused by the deterioration in the terms of trade (the rise in import prices). The final effect of quantitative easing in Japan has therefore been a prolonged recession linked to the negative effect of the depreciation of the yen on the Japanese economy.
Will the ultimately very negative effect of quantitative easing on the Japanese economy be repeated in the euro zone from 2015?
– First of all, we have to keep in mind that wealth effects are very weak in the euro zone: even if quantitative easing drives up share and real estate prices, it will not stimulate demand in the euro zone;
– The crucial issue is exchange rates: could the depreciation of the euro, which has already stared, worsen the euro zone’s economic situation, in the same way as the depreciation of the yen has worsened Japan’s situation? This could happen only if:
• The price-elasticity of euro-zone exports is low (as in Japan);
• The weight of the euro zone’s indispensable imports is significant (as in Japan), which would mean that the value of imports increases markedly when the euro depreciates.
Unfortunately, that seems to be the case: we should not rule out the possibility that, as in Japan, the depreciation of the euro may have a negative effect on real activity. This will however, be masked by the fall in the oil price.
