Tag Archives: Abenomics

Japan’s Disappointing Numbers

Here‘s the news from the Wall Street Journal about Japan’s latest economic numbers:

The country’s gross domestic product . . . expanded at an annualized pace of 1.0% in the October to December period. Economists surveyed by The Wall Street Journal predicted a 2.8% rise.

The anemic growth figure represents a further slowing of the economy after a sharp deceleration in the July-September quarter, when Japan’s economy expanded 1.1%.

The data is likely to raise doubts about whether Prime Minister Shinzo Abe’s push to turn around two decades of lackluster growth has really revived consumer and corporate confidence enough to sustain a recovery.

Now, this is the first time I’ve blogged about Japan, so please bear with me! Any any input is welcome: I’d love to gain more knowledge on Asian economies, about which I know very little.

But from what I understand, Abenomics has not been active for very long: a little over a year perhaps. And I also understand that the policies have generally been good for Japan in (the first half of) 2013. It seems to me that we may need some more time before we jump to conclusions about the effectiveness of Abenomic policies.

After all, it doesn’t strike me as immediately clear that the greatest of Japan’s worries is a consumer confidence problem. Here’s what Japan’s rGDP has looked like over the years (from Google/the World Bank):

Capture

 

It seems to me that from about 1993 to about 2008 Japan, while having some business-cycle like fluctuations, had pretty much 0 growth. It is only recently that the numbers are starting to look more positive. I would imagine that what this really points to is not so much a confidence problem, but some structural one. In the Solow Growth Model, it is possible for some countries to fall into a poverty trap: essentially, they cannot invest enough to sustain growth because they need to pay for the here and now, and not tomorrow. While Japan fairs far better than the most extremely impoverished nations, one has to wonder if some sort of trap is holding it back.

Still, some economists remain optimistic. Yoko Takeda, chief economist at the Mitsubishi Research Institute, thinks that because business profits have done so well, wages and investment will increase. This would be excellent for the economy as a whole: if the country is in some sort of trap, then greater investment is key to lifting it out. What is more, higher wages will surely lead to high spending, hopefully allowing the economy to continue to grow at a healthy pace.

So, Japan’s numbers don’t look fantastic, but at least growth is happening, and there is still much room for hope.

(Revised) Reverse Repurchase Program and Its Use in American “Abenomics”

We all have been aware of the FED’s latest decision to taper its bond-buying program by $10 billion from the Federal Open Market Committee (FOMC) meeting this week. Another interesting decision that came out, at least to me, was the decision to extend its reverse repurchase program (also known as reverse repo) by a year. By implementing reverse repurchase program, the FED aims to be able to control the short-term interest rate when it needs to raise it in the future. The advantage of this program is that the FED doesn’t have to pull money out of the economy to raise the interest rate when it wants. This advantage of not having to lower the money supply in the future explains how this program can be implemented to achieve a shift in the FED’s monetary policy. This shift is to follow permanent increase in the monetary base, which is what the Bank of Japan has been doing under Abenomics.

japan monetary base

In the US, QE1 and QE2 and Japan’s first QE during 2001-2006 were seen by the public as a temporary increase in the money supply by the central banks rather than permanent one. On the other hand, QE policy the BOJ has been employing since April 2013 is to double the money supply permanently. David Beckworth explained how the way public sees an easy monetary policy as temporary vs permanent money supply increase affects the performance of these QE programs. In his words:

“I have long argued, along with other Market Monetarists, that the Fed could solve this problem by adopting a NGDP leveltarget. Why would this help? The key reason is that it would create an expectation that some portion of the monetary base growth from the asset purchases would be permanent (and non-sterilized by IOER). That, in turn, would mean a permanently higher price level and nominal income in the future. Such knowledge would cause current investors to rebalance their portfolios away from highly liquid, low-yielding assets towards less liquid, higher yielding assets. The portfolio rebalancing, in turn, would raise asset prices, lower risk premiums, increase financial intermediation, spur more investment spending, and ultimately catalyze a robust recovery in aggregate demand.”

In short, when people sees expansionary monetary policy as permanent one rather temporary, they will increase their spending today. For QE3, Beckworth explains that it has had some indication of permanent money supply growth with “its data-dependent nature and appears to have offset much of the 2013 fiscal drag” and this could be a reason

Now let’s get back to the reverse repo program. By using this tool instead of targeting federal funds rate, it can convince the public that it will not lower the money base in the future to raise the interest rate. In other words, the FED will be able to make shift to a monetary policy that will sustain the higher monetary base created by QE3 permanently AND convince the public that it will be indeed permanent. This type of monetary policy or QE that raises the monetary base permanently rather than temporarily could achieve more private spending and economic growth as we can see from Japan’s latest growth under Abenomics (one could argue that the other two main policies or arrows of the Abenomics also helped Japanese economy to improve). Of course, we cannot take the latest Japan’s inflationary success and economic growth in 2013 as a product of the Abenomics. And the U.S. is far from implementing this kind of economic reform consisting of fiscal, monetary, and regulatory policies, but if the Abenomics turns out to be Japan’s success story in the future, the U.S. should study this “real life experiment” of Japan. If it chooses to do the experiment on itself, the reverse repo program is their experiment tool.

 

Japan’s (Domestic) Economic Recovery – is this an urgent problem?

In 2013, I certainly think the term “Abenomics” was a very hot, controversial economic keyword. As Shinzo Abe was elected as the prime minister of Japan in 2012, Abe advocated economic policies composed of fiscal stimulus, monetary easing and structural reforms in order to revitalize the Japanese economy. Until now, Abenomics has been pretty successful, as Japan’s economy is escaping from the “lost twenty years” and expanding slowly.

According to an article in The Economist (Abe’s master plan), Japan’s nominal GDP was same as in 1991 by the time Abe became prime minister, while Nikkei (the value of shares on the Tokyo Stock Exchange) is barely at a third of its peak. Within first weeks Abe announced extra government spending worth of 10.3 billion yen, which is equivalent to about 100 billion U.S dollars. It led to weaker Yen compared to other currencies, which should lead to a boost in export.

However, according to the Wall Street Journal article (Japan’s Backward Recovery), the volume of export has not recovered much compared to what Abe actually anticipated. Although Japan is recovering from its economic slump and expanding rather rapidly, its economic growth is led by increase in domestic demand instead. Continuing weakness in the world economy outside of United States is a main reason of dampened demand for Japan’s exports. For instance, in December the export volume rose 2.5% on year, compared to 7.3% in overall production. It can be deduced that the gap between export volume and overall industrial production is consumed by domestic market, and that is what the article is concerned about.

Although the article has a good point, I don’t think it is an urgent problem. Japan has estimated population of 126,659,683 which is 10th in the world. It is often said, countries with population bigger than 100 million has less dependency on export, as domestic market itself is pretty big and therefore domestic companies can “sustain” from this large domestic market. For Japan, with population larger than 100 million, a huge boost in domestic market is not a bad news, in my opinion. Japan was always concerned about its continuous deflation over the years, and this boom of demand in domestic market will help Japan to reach its goal of 2~3% inflation rate as well. Furthermore, I believe that the world economy will eventually get better, and Japan’s export will increase as well if they continue to produce fine quality products which satisfy domestic consumers. So, instead of keep weakening the value of Yen, I think now is a good time for Abe to focus more on stabilizing domestic price level.

Reverse Repurchase Program and Its Use in American “Abenomics”

We all have been aware of the FED’s latest decision to taper its bond-buying program by $10 billion from the Federal Open Market Committee (FOMC) meeting this week. Another interesting decision that came out, at least to me, was the decision to extend its reverse repurchase program (also known as reverse repo) by a year. By implementing reverse repurchase program, the FED aims to be able to control the short-term interest rate when it needs to raise it in the future. The advantage of this program is that the FED doesn’t have to pull money out of the economy to raise the interest rate when it wants. This advantage of not having to lower the money supply in the future explains how this program can be implemented to achieve a shift in the FED’s monetary policy. This shift is to follow permanent increase in the monetary base, which is what the Bank of Japan has been doing under Abenomics.

japan monetary base

In the US, QE1 and QE2 and Japan’s first QE during 2001-2006 were seen by the public as a temporary increase in the money supply by the central banks rather than permanent one. On the other hand, QE policy the BOJ has been employing since April 2013 is to double the money supply permanently. David Beckworth explained how the way public sees an easy monetary policy as temporary vs permanent money supply increase affects the performance of these QE programs. In his words:

“I have long argued, along with other Market Monetarists, that the Fed could solve this problem by adopting a NGDP leveltarget. Why would this help? The key reason is that it would create an expectation that some portion of the monetary base growth from the asset purchases would be permanent (and non-sterilized by IOER). That, in turn, would mean a permanently higher price level and nominal income in the future. Such knowledge would cause current investors to rebalance their portfolios away from highly liquid, low-yielding assets towards less liquid, higher yielding assets. The portfolio rebalancing, in turn, would raise asset prices, lower risk premiums, increase financial intermediation, spur more investment spending, and ultimately catalyze a robust recovery in aggregate demand.”

In short, when people sees expansionary monetary policy as permanent one rather temporary, they will increase their spending today. For QE3, Beckworth explains that it has had some indication of permanent money supply growth with “its data-dependent nature and appears to have offset much of the 2013 fiscal drag” and this could be a reason

Now let’s get back to the reverse repo program. By using this tool instead of targeting federal funds rate, it can convince the public that it will not lower the money base in the future to raise the interest rate. In other words, the FED will be able to make shift to a monetary policy that will sustain the higher monetary base created by QE3 permanently AND convince the public that it will be indeed permanent. This type of monetary policy or QE that raises the monetary base permanently could achieve more private spending and economic growth as we can see from Japan’s latest growth under Abenomics (one could argue that the other two main policies or arrows of the Abenomics also helped Japanese economy to improve).

(Revised) Abenomics- Japan’s successful recovery

I recently read a few articles highlighting the success of Abenomics in Japan and found it extremely interesting how successful Japan has been in recovering from the financial crisis of 2008.  Abenomics refers to the economic policy of Shinzo Abe, Japan’s current Prime Minister.  Shinzo Abe expanded the Japanese economy by using aggressive quantitative easing, increase in public infrastructure spending and devaluing the Yen.  Abenomics was introduced in hopes that expansionary economic policies would solve Japan’s slowing growth and exports.  Japan hoped to accomplish this by using inflation targeting, depreciating the yen, setting negative interest rates, quantitative easing, expansion of public investment, having the Bank of Japan buy operation construction bonds and revising the Bank of Japan Act.  Economists believe that the policies of Abenomics will increase fiscal spending by 2% of GDP, raising the deficit to around 11.5% of GDP for 2013.  The Japanese parliament agreement to increase the consumption tax from 8% in 2014 to 10% in 2015 in order to offset the rise in the GDP deficit.

One potential problem for Abenomics is how the increase in the consumption tax is going to affect domestic demand.  According to Asian Economic News, “Japanese households have begun to lose faith in Abenomics”.  The consumer confidence index in Japan witnessed a drop in December, illustrating increased nervousness about the increased consumption tax.  The biggest drop was in consumer willingness to buy which could have a drastic effect on the trade balance since it was being supported by strong domestic demand.  Supporters of Abenomics point to companies increasing wages as the key to protecting consumer confidence.   According to the Wall Street Journal, that’s exactly what countries are going to be doing.  “More companies in the region are taking a positive stance toward a rise in employees’ salaries on the back of their rising profits”.  The increase in wages could help offset the pain that households feel from the increase in the consumption tax.

Due to Japan’s recent release of their last quarter growth, I figured it would be interesting to look back and see if it has been successful.  Japan’s growth grew at a sluggish pace of 1%, lower than the 2.8% expectation .  Unfortunately, the falling Yen has not increased exports as much as researchers believed.  Japanese exports have only risen by 1.7% while imports have grown by 14.9%.  The belief that consumer spending would increase right before the increase in the sales tax has also been unfounded.  Consumer spending has grown by .5%, below the .7% estimation due to wages not yet rising significantly.

I believe that these numbers are too weak with the upcoming sales tax increase.  One of the biggest arguments for Abenomics and the sales tax increase was that Japanese companies would eventually increase wages.  Japanese companies though have been shifting factories overseas due to the cheaper labor.  Business spending has not increased as much as expected, which could potentially mean that Japanese wages will not increase.  Japan either needs to step in to increase business spending through corporate tax cuts or the Bank of Japan may need to rethink the sales tax increase because consumer spending is going to be most likely drop even more when the sales tax increases and wages don’t.  One positive that could help Japan increase exports is if the Trans-Pacific partnership trade agreement gets approved.  This would drastically reduce trade barriers in Asia and allow Japan access to emerging Asian markets.

Abenomics in 2014

After Shinzo Abe took office as the Prime Minister of Japan in December 26, 2012, there has been much excitement over what is called the Abenomics. To end Japan’s long lasting deflation and sluggish, if not negative, growth over the past 15 years or so, Abe took radical measures to revive the economy. These include quantitative easing, devaluations of yen and large investments in public infrastructure programs. Abe’s effort received highlight around the world as it showed impressive results thus far.

Japan’s concern for their economy started in 1989 when the real estate bubble bursted. Following the 1970’s economic boom in Japan, Japanese seized the opportunity of low interest rate with high liquidity in the market to invest heavily in real estate as well as stocks in both domestic and foreign investments. However, when the Bank of Japan realized that the hype over this excessive investment was not sustainable, it raised the interest rate sharply, bursting the bubble. Unpayable debt accumulated and stock market plummeted along with asset prices in real estate. In order to stabilize the economy, the central bank made big volumes of loans, government injected extra money into the economy and a large restructuring of debt took place. Many banks could not get extra loan even with very low (or lower bound zero) interest rate due to bad credit. Stagnation took place and this was the start of what is called the lost decade.

Howe did Abe fix this problem? As mentioned above, large government spending, deliberate depreciation of yen and aggressive quantitative easing. The depreciation of yen especially played a major role as it lead to a large export boom. The Nikkei, while still under 58% of 1989 level, gained 57% in 2013 (http://articles.economictimes.indiatimes.com/2014-01-12/news/46113491_1_core-consumer-price-index-nikkei-abenomics).

The problem is then, how is Japan going to pay for all these? According to January 13, 2013 news, Japan hit a record current-account deficit as imports climbed back up. The article says, “Weakness in the yen and extra demand for energy because of nuclear-plant shutdowns are driving up Japan’s import bill, highlighting drags on the recovery that will also include a sales-tax increase in April. A longer-term risk for the nation is any shift to a sustained deficit that would undermine investor confidence in Japanese government debt” However, the consensus among Japanese economist is that the “the deficit should start to gradually shrink on the back of a global recovery” (http://www.bloomberg.com/news/2014-01-14/japan-posts-record-current-account-deficit-as-import-costs-swell.html).

In addition, economists like Paul Krugman fears that the scheduled rise in consumption tax from 8% to 10% in 2014 will discourage spending, hurting efforts to climb out of deflation. With deflation effect still in place, this increase of 2% will hurt more in real terms (http://krugman.blogs.nytimes.com/2013/06/10/abenomics-and-interest-rates-a-finger-exercise-wonkish/?_r=0). With long history of deflation in the past two decades with very sluggish growth, this rise in tax could act as a sharp break on the upward trend.

The tradeoff between deficit growth and economic expansion must be carefully reviewed. And only time will tell how Japan will react to the new roller-coaster ride the Japanese economy has gone through in the past year.