Tension in East Asia has been rising ever since Japan embarked on a path of extreme money printing. Japanese Prime Minister of Japan Shinzo Abe hopes that the monetary stimulus will help the economy. It may do the exact opposite.
Japan is in a desperate situation. An aging population, no immigration to fill out the gaps in the work force, a low savings rate and recently Japan has started to note a trade deficit. The trade deficit is to some degree a consequence of the shutdown of Japan's nuclear power plants in the wake of the tsunami, which in turn has forced the Japanese to import move expensive coal and gas.
So far the money printing has managed to weaken the yen almost 30% to the US dollar in about six months. Impressive! This has made Japanese export more competitive and hasn't done too much damage internally so far because the Japanese debt, although huge, is mostly domestic. There are problems however, serious problems.
The weak yen has hit other Ease Asian economies hard, most noticeably the South Korean economy, whose exports is quite similar to that of Japan. The South Korean won has gained in value to the yen by about as much as the yen has lost to the dollar, almost 30% in six months. This is a problem for South Korea's exports.
Taiwan too has felt the negative consequences of the weaker yen. The Taiwanese dollar has, like the won, gained almost 30% against the yen in about six months. And what about China? The yen has also weakened against the Yuan, which is not making the Chinese happy.
Japan's public debt is about 230% of GDP. Total debt is 700%! It is the most indebted nation in history. Japanese bond yields are very low at the moment, the 10-year bond yield is only 0.6%. In spite of this the interest payments on the debt consume half of the government income. If the bond yields were to rise 2%, and they have been even higher in the past, the interest payment would exceed the total government income. Then there would be nothing left but to commit hara-kiri.
Japan wants to export its way out of the crisis but the problem is that so do a lot of other countries. If everybody tries to devaluate their currencies at the same time it doesn't work. The exchange rates stay the same but there will be more inflation in each and every country. It becomes a race to the bottom.
Japan has essentially started a currency war. The outcome is hard to predict but in worst case it could lead to real war. The conflict over The Senkaku/Diaoyu Islands
gave us a taste of what might come. Japan has run out of options and out of time. The coming years will be painful.