Indian policymakers will be keenly watching the developments as Japan’s economy shrank for the second quarter in a row.
With the US fully tapering its asset purchase programme, emerging countries such as India have been receiving large slices of cheap money that Japan had been injecting into the system to make world’s third-largest economy grow and reverse decades of contraction.
For India, Tokyo’s easy monetary policy was partially offsetting the effects of the US Fed’s unwinding of its quantitative easing programme, and keeping the stock markets humming even as dollars of other funds moved out in anticipation of higher returns closer home in the US.
In 2013, Japanese Prime Minister Shinzo Abe launched an ambitious turnaround strategy that rapidly became known as Abenomics. This involved printing hundreds of billions of dollars by the Bank of Japan to buy government bonds and pump money into the system.
More critical for India would be the health of Japan’s corporate sector. During his five-day visit to Japan, his first bilateral trip outside the subcontinent, Prime Minister Narendra Modi, who shares warm personal chemistry with Abe, had managed to extract an FDI pledge of $35 billion spread over five years.
India needs capital to propel the investment rate to over 40% of GDP. Foreign direct investment, besides bringing in the crucial dollars, also plays an ambassadorial role as corporate giants are akin to global citizens who help countries reap the benefits of comparative and competitive advantage—both economically and strategically.
The latest crisis in Japan and a probable snap poll could upset India’s medium-term expectations on foreign capital inflows.