T

he Bank of Japan has a new governor and a new policy. Governor Kuroda is planning to print money. Actually the Bank of Japan has always printed money, but now it plans an explosive printing of money. If the Bank of Japan is printing money in an aggressive manner, surely this means that global liquidity will surge?

This worry is ill-founded. The reason is simple; '€œglobal liquidity'€ does not exist. Imagine trying to pay for a hamburger in Austin, Texas using a thousand yen note '€” the reaction of the hamburger seller is likely to be fairly brusque, possibly even rude.

Money printed in Japan represents a claim on Japanese goods and services only. It does not matter how many yen bank notes the Bank of Japan prints, Governor Kuroda cannot force American hamburger restaurants, or Thai hotels, or Taiwanese hairdressers to accept those yen bank notes in exchange for the goods and services that they offer for sale.

If the Japanese choose to print a lot of yen, and then convert that into won or Hong Kong dollars then there will be an impact on the Korean economy or the Hong Kong economy. But, of course, the scale of the impact will depend on three things: The amount of money that is printed in Japan; how much of the newly printed money is converted to buy foreign currency; and the exchange rate that is used to convert that money.

If the Bank of Japan were to increase Japan'€™s money supply by 25 percent, the Japanese could use the money to buy more goods and services outside of Japan. However, if the yen has weakened by 25 percent '€” at the same time as more money is printed, then the supply of Japanese yen has risen by 25 percent, but the yen can buy 25 percent less foreign currency and thus 25 percent fewer foreign things.

This is why the explosion of money supply in Zimbabwe in 2008 did not have a meaningful impact on other countries. Even a conservative estimate would put the increase in Zimbabwean money supply at billions of billions of percent.

Outside of Zimbabwe no one really cared because the exchange rate adjusted, and eventually no one would take Zimbabwean dollars at all. Similarly, the drop in the value of the yen that we have already witnessed will dampen the impact of Japanese money in the global economy '€” making Japanese money less powerful.

Therefore, what Governor Kuroda does is not actually very important. To judge the impact of the Bank of Japan'€™s actions, we must follow what happens to the money after it leaves the Bank of Japan.

Some of the money is, in economic terms, going to crawl into the corner of a bank vault and quietly die. Japanese banks have a long history of taking money and doing nothing with it.

This means that the additional money the central bank has created is economically inert. Switzerland (where far more money has been printed, proportionately, than Governor Kuroda intends to print in Japan) is a good example of this happening.

However, if banks can be persuaded to lend some of the money, there is a reasonable chance that Japanese banks could look to increase their share of overseas markets. The domestic Japanese market does not, perhaps, offer many opportunities for lending. Many companies are cash rich and Japanese consumers seem reluctant to borrow. If Japanese banks do lend overseas, particularly to Asian economies, then they could create easier credit conditions abroad (subject to the extent to which the yen weakens).

It is also possible that any yen weakness resulting from Japanese bank lending overseas will result in asset allocation changes by Japanese life insurers and pension funds. Japanese institutional investors, as these entities are collectively known, have considerable firepower when it comes to the size of their investment portfolios.

Much of their investing to date has remained inside Japan. If institutional investors believe that the yen will weaken, they have an incentive to look internationally. Caution is needed in anticipating this, however Japanese institutional investors'€™ promises of overseas investment in the past have often failed to materialize.

Governor Kuroda'€™s new policy may have implications for the rest of the world, but we must not be too simplistic in interpreting its consequences. The impact of Japanese policy on other countries is dependent on policy actions of those countries.

If the yen depreciates, the international impact of increased Japanese money supply is neutered. If other countries resist yen depreciation, then Japanese monetary policy may have an international impact. However, this will only be true if Japanese banks break with history and chose to do something with the cash Governor Kuroda gives them.

The writer is deputy head, Global Economics, UBS Investment Bank.