Japan prepares to print more money

Another global financial convulsion we can do without but, thankfully, this one is made in Japan and has its good side. For now. There's not a credit rating downgrade, defaulting European country or a shaky bank in sight.

Better still, Japan will be printing enough yen to overflow into our sharemarket and keep rates low for longer. So what's the problem? The economic repercussions of a cheap yen.

Something had to give because Japan's inflation and asset values have been falling, while the only thing that grows there is government debt - almost 240 per cent of gross domestic product, the result of an ageing population.

To put that in perspective, the government debt of bankrupt Greece is a positively modest 142 per cent. Ours, since you asked, barely registers at 27 per cent.

Funnily enough, the markets aren't at all fussed about Japan's debt because almost all of it is owed to itself. It's the deflation that's the problem.

The good news is its creditors, who aren't world banks but future generations of Japanese taxpayers, haven't forced Japan into fiscal austerity. It's the opposite - voluntary fiscal laxity.

Japan will double the amount of money circulating in two years, putting its note printing in the same league as the quantitative easing in the US that I've gone on about before and has flooded the global financial system with greenbacks.

Er, won't this be inflationary? Too right, that's the whole idea. Japan wants to grow out of the problem by turning an inflation rate of minus 0.7 per cent to 2 per cent. Don't know why it doesn't just ask one of our power companies how to go about it.

Anyway so far, so good. The printing will devalue the yen (the cherry blossoms have started flowering, should you want to take advantage of the cheaper exchange rate), which will boost the Japanese economy by making its exports cheaper in other currencies. Japan is still our second biggest export market, so that can't do us any harm.

The Japanese sharemarket is the standout since offshore profits translate into higher yen. But we ain't seen nothing yet. The Bank of Japan will be buying shares in exchange-traded funds, too.

That's only one step away from cutting out the middleman and buying shares directly. Hang on, it says it will also be buying shares in listed property trusts. There you go.

As more dollars poured into Wall Sreet, more yen will do likewise for the Nikkei.

Two funds specialise in Japanese shares, the listed iShares' IJP or the unlisted Platinum Japan Fund. The catch is the sharemarket can go one way, the currency the other, cancelling each other out.

Mind you, with predictions of a 40 per cent rise in the Tokyo sharemarket in 2013, from a long-lasting low base, the currency shouldn't figure much.

Rates in Japan are falling as more yen are printed, once again tempting Japanese housewives who famously borrow at next to nothing interest rates and invest in high yielding shares or term deposits here.

So what's the problem? There are two. If it works and inflation rises, there'll be a rout in the Japanese bond market. And the biggest bondholders are its banks. You can see where that might go - the Greece way.

The other is that a weakening yen throws down the gauntlet to China. A currency conflict between those two doesn't bear thinking about.

Read David Potts in Weekend Money, with The Sunday Age.

Twitter @money potts