JPY depreciation required to exit deflation

Former BoJ Governor Masaru Hayami once quipped that "no one ever devalued to prosperity." But Japan choosen devaluation (technically depreciation) under Abenomics. Two popular views are that JPY depreciation was necessary for Japan to exit deflation and that it would kick-start growth in Japan's lethargic, debt-burdened economy. Yet, neither view appears compelling when examined more closely.

The view that depreciation is necessary to create inflation is in fact backwards. Rather than cause future inflation, under purchasing power parity (PPP) the JPY's depreciation was required to offset expected future inflation induced by the BoJ's aggressive monetary easing program, and likely also reflects some overshoot of that path, says Barclays. 

While depreciation can temporarily boost inflation if prices are sticky - and this clearly was an aim of BoJ policy after 20 years of deflation.

"As we noted in Twilight of inflation stability, 20 May 2015, exchange rate depreciations are relative price changes that lack persistence in creating general price inflation without sustained demand pull", added Barclays.