Sunday, November 23, 2014

The Promise of Abenomics

TOKYO – Japanese Prime Minister Shinzo Abe’s program for his country’s economic recovery has led to a surge in domestic confidence. But to what extent can “Abenomics” claim credit?

Interestingly, a closer look at Japan’s performance over the past decade suggests little reason for persistent bearish sentiment. Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century. With a shrinking labor force, the standard estimate for Japan in 2012 – that is, before Abenomics – had output per employed worker growing by 3.08% year on year. That is considerably more robust than in the United States, where output per worker grew by just 0.37% last year, and much stronger than in Germany, where it shrank by 0.25%.

Nonetheless, as many Japanese rightly sense, Abenomics can only help the country’s recovery. Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal, and structural policies. Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can.

The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as President of the Asian Development Bank. During the East Asia crisis of the late 1990’s, he saw firsthand the failure of the conventional wisdom pushed by the US Treasury and the International Monetary Fund. Not wedded to central bankers’ obsolete doctrines, he has made a commitment to reverse Japan’s chronic deflation, setting an inflation target of 2%.

Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.

Kuroda’s stance has already weakened the yen’s exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary-policy interdependence: if the US Federal Reserve’s policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Someday, we might achieve closer global monetary-policy coordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere.

Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners’ refinancing problems, even at lower interest rates, or small and medium-size enterprises’ lack of access to financing. Japan’s monetary policy, one hopes, will focus on such critical issues.

But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. First, there is the counterfactual case: How would Japan’s economy have performed in the absence of fiscal stimulus? Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990’s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%. Second, anyone visiting Japan recognizes the benefits of its infrastructure investments (America could learn a valuable lesson here).

The real challenge will be in designing the third arrow, what Abe refers to as “growth.” This includes policies aimed at restructuring the economy, improving productivity, and increasing labor-force participation, especially by women.

Some talk about “deregulation” – a word that has rightly fallen into disrepute following the global financial crisis. In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations.

What is needed is the right regulation. In some areas, more active government involvement will be needed to ensure more effective competition. But many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations. Abe can only set the tone, not dictate outcomes. For example, he has asked firms to increase their workers’ wages, and many firms are planning to provide a larger bonus than usual at the end of the fiscal year in March.

Government efforts to increase productivity in the service sector probably will be particularly important. For example, Japan is in a good position to exploit synergies between an improved health-care sector and its world-class manufacturing capabilities, in the development of medical instrumentation.

Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater (and more effective) female labor-force participation. While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. Further investments in research and education are likely to pay high dividends.

There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed:  the country benefits from strong institutions, has a well-educated labor force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region. It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation.

If the comprehensive agenda that Abe has laid out is executed well, today’s growing confidence will be vindicated. Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.

Read more from our "Will Japan's Sun Rise?" Focal Point.

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    1. CommentedParrain Boursorama

      It is instructive that Professor Rogoff cites Harmston. The value of gold is more discussed than the value of bread but there is no doubt which one is the more important and it is not the value of the mineral. Malthusian limits will devalue gold in the long run.

    2. CommentedJoshua Ioji Konov

      The PM Abe actions are revolution in economics, whereas instead of waiting economic activities to happen, they are provoking and promoting such with the connecting their monetary, fiscal and stimulus policies to the inflation (not to the debt as current geniuses of economics hold on). PM Abe's economics is one of the future prompted by the globalization and rising productivity, and China's overproduction. However, such actions would succeed if the beneficiaries are the small and medium businesses and investors that would boost the real market competition, instead of further concentration of capital into the big transnationals and investors..


      In my opinion Prof. Stiglitz is being very optimistic about the Japanese economic future. The artificial way of adjusting inflation upward and increasing nominal GDP could only benefit in the short run, but in the long run the real economy will have minimal or negative growth. To critically analyst Japanese economy, once should not fail to address the demographic and consumer behavior. In my opinion, the spurious way of increasing the money supply will only lead to increase in the saving of the aging population rather than spending. This has already started showing from improvement in the trade balance and expected higher current account balance which reflect enlarging saving-investment gap. In conclusion, to some extend I would accept the optimistic view on Japan in the short run, but the economy may not be able to correct it in the long run. In fact the risk of a greater failure in the medium to long run is much higher now than ever before.

    4. CommentedA.J. Sutter

      As Prof Stiglitz correctly notes, Abe doesn't have the clout to do more than ask employers to raise wages. But he has recklessly embarked on a policy of inflation, regardless of whether employers do so. (For this to lead to increased growth in real terms requires of course that they increase wages in excess of the rate of inflation.) Even if they comply, this will only benefit those who are employed by firms.

      Unfortunately, everyone in Japan is affected by inflation: at least 60% of Japan's food calories are imported, including an even higher percentage of soy beans and soy bean products, which are important staples. Bigger bonuses from employers won't help Japan's elderly, unemployed, or single mothers who have only part-time and/or temporary employment. Abe's advisers, such as Takenaka Heizo, are the same Koizumi-era proponents of "structural reforms" that led to making employment more precarious. It is unlikely they will reverse their policies now that they're back in power.

      It's especially galling that Prof Stiglitz highlights that the BoJ's exchange rate manipulations have made Japanese goods "more competitive." He should check the statistics of his old employer, the World Bank. Far from being an export-dependent economy, in 2011-2012 Japan earned only 15% of its GDP from exports -- the lowest figure in the G7 other than the US (14%), and among the lowest in the world. But that figure, accomplished during the DPJ administration and with a strong yen that benefits Japan's residents, is near a HISTORICAL HIGH: during the heyday of "Japan Inc.," the figure was in the single digits.

      The discourse of exports is a smoke-screen to hide the fact that the financial economy, not the economy of goods and services, is the real reason for the exchange rate. A weak yen benefits the earnings statements of Japan's multinationals. It does nothing for Japan's GDP, since those multinationals are producing and selling goods overseas -- which is also precisely why they want a weak yen, so that repatriated profits will appear plumper. Those companies are hiring overseas, too, so it doesn't help reduce unemployment in Japan, which although low by global standards is near historical highs by domestic ones.

      Like most economists, Prof. Stiglitz ignores the political dimensions of what is happening in Japan. Nobel laureates of course speak to Very Important People, such as academics and businesspeople who have been schooled in mainstream economics at major US or UK institutions. What elevates the mood of such august persons may be far removed from -- or even antithetical to -- what makes the average Japanese better off. To the extent that average people in Japan are positive about the Abe Administration, is it really because of the government's inflation policies? because of Abe's determination to open Japan up to competition?

      There are at least two important factors at work that help to explain high approval ratings for Abe. One is his stand on foreign affairs, which have nothing to do with the economy. The DPJ administrations were all terrible in this regard, and now that China and the Koreas have been more aggressive, each in their different ways, the country is shifting to the right. Another is that there isn't a free press in Japan. The press cooperate with the government to get the government's message out -- otherwise, they will lose access or even licenses. If you don't live in Japan, the extent of this self-censorship -- or outright propagandizing, in the case of some of the more conservative media companies like Yomiuri -- may be hard to appreciate.

      The Abe Administration especially needs to rely on media manipulation because it is entirely lacking in democratic legitimacy. It and its coalition partners took over the country with a minority of the popular vote between them (41% of the votes cast, 25% of the electorate). Moreover, the election law under which they were elected was unconstitutional. They are in fact usurpers, though it is very possible that Japan's ultra-conservative Supreme Court will let them get away with it, as they have done with many other unconstitutional elections held in the past (unconstitutional, mind you, according the Supreme Court's own judgment, not merely my or constitutional scholars' opinions).

      Abe's recent comments about increasing the number of women in the workforce need to be seen in this light, too. The context was a hint of his "new growth strategy," the first to be released by a Japanese administration since 2010. The release is expected for June. In July, there is an election for the Sangiin, the upper house of the Japanese parliament a/k/a the Diet. Abe's party doesn't yet hold a majority there, which means he faces some possible resistance in his project to amend the constitution (mainly to broaden the role of Japan's military, but also to limit the human rights of Japanese citizens, as a draft released earlier this year makes clear). His comments were meant to flatter female voters. In fact, his proposal to allow women to keep their jobs through 3 years of maternity leave will probably have exactly the opposite effect from its ostensible intention: many companies simply will hire fewer women. (Even though the parental leave would in theory benefit men, too, management and peer pressure in Japanese companies already prevent men from taking the full amount of parental leave to which they are currently entitled. One professional acquaintance in his 40s proudly told me he took off the afternoon when his first child was born earlier this year.)

      Among finance professionals here, "Abenomics" has been replaced by a new buzzword, "AKB". A sarcastic allusion to the Guinness world record-holder for Largest Pop Group, the cloying and talentless Japanese girl group AKB48, it stands for "Abe-Kuroda Bubble." Prof. Stiglitz ought to learn more about the local music before he lends his prestige to destructive policies such as the ones he endorses here.

    5. CommentedLuis de Agustin

      Since last September when Japanese Prime Minister Shinzo Abe came to power and donned pink colored glasses, the yen has declined about 18 percent against the US dollar and 9 percent relative to gold. Mr. Abe’s explicit goal is to increase Japanese inflation to two percent. At first sight, the stock market welcomed the new policy, with a gain of 34 percent over the last six months, but that’s in yen. In dollars, the Japanese market has returned 12.6, not much more than the 10.7 return earned by the recession ridden euro zone.

      Strategic investment research consultancy, Wainwright Economics, continues to suspect that stock market gains in the US, Europe and Japan alike have been carried more by an acceleration of growth in the emerging world than by domestic economic improvement. The research house believes that a weak yen will not help Japan any more than a weak dollar has helped the United States historically, notwithstanding the initial rosy picture.

      In an update to analysis that Wainwright Economics published over ten years ago, the work demonstrates that inflation has been bad for Japanese economic growth and that much feared deflation has been a blessing. Although Wainwright asserts that inflation is the wrong goal for Japan, there is plenty of evidence that weakening the yen is the right way to go about achieving it; except that the convention of expressing currency change relative to the US dollar does not work in a world in which the dollar itself is a variable.

      When considering currency rallies or tumbles, these need to be compared relative to something else, says Wainwright’s head of research David Ranson. If the rally, for example, is relative to the euro and/or another currency, then it must be said that currency values are primarily the result of government policy and of agreements between governments. Only secondarily or derivatively do they respond to economic factors such as relative growth rates or the current account deficit.

      According to Ranson, major currencies do not really float. While there’s no publicly announced agreement among the US, European and Japanese central banks regarding exchange rates, “closet pegging” prevails. None of these regions will allow the others’ currencies to be significantly cheaper than its own, threatening to undercut its export industries. Behind a veil of secrecy, there are talks and negotiations about this all the time. Japan has so far been given leave to talk down the yen, but at some point, there will be opposition. When Japan’s finance ministry’s cool shades are finally flipped up, it may unfortunately see a monochromatic economy sinking below the horizon.

      Luis de Agustin

    6. CommentedMatt Russo

      "Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can."

      Perhaps this is an old Japanese kotowaza, or Abe perhaps lifted this from Akira Kurosawa's 'Ran', but it forgets that in the latter film, the hero, Saburo (the "third son"), then took this proposed lesson from his father in the form of 3 actual arrows, and then broke all three together over his knee. End of "lesson"!

    7. CommentedAvraam Dectis

      The monetary part of Abenomics is clear and widely accepted. The fiscal part seems to still be up in the air. I suggest a vigorous effort to increase the birth rate, through generous incentives. This would effectively provide a decades long stimulus as the additional taxpayers paid taxes and provided services.

      People are the ultimate infrastructure.

    8. CommentedYoshimichi Moriyama

      Abe has started from a very good place to start. It was the only place to start; no one could have started from anywhere else.

      I am amazed so many people of foreign countries know so well about Japanese economy. All is well that ends well, but the sad fact is that all is not well that begins well. As Prof. Stiglitz has said. there are hurdles to jump over.

      Joseph Grew was US ambassador to Japan from 1932 to 1942. He watched the turbulent years of the1930's Japan. One comment of his was that the Japanese shy away from difficult problems instead of facing up. What I have in mind is the Japanese inefficient use of national land. I understand European countries have stricter reglulations concerning the use of land.

      The Japanese Liberal Democratic Party has been in power almost without a break for the past sixty years and it has consistently avoided this land problem. This misguided land policy has been the cause for the generally lower, otherwise bigger, level of disposable incomes of the people in general. It has also made production costs unavoidably and unnecessarily higher, shrinking domestic demand.

      Another hurdle, usually unobserved, is that leaders of the economic circles are naively credulous. They read and belived Prof. Ezra Vogel's Japan As The Number One. They thought amidst the bubbles of economy that Japan was overtaking the United States. They believed that the huge deficits of the US was because the Japanese market was closed. They believed like economists what rational expectations hypothesis and supply-side economics said. They believed, after the bubbles burst, everything of Japanese economic and corporate management was wrong.

      The best I can say for now is that we must keep to the started course and bon voyage.

    9. CommentedG. A. Pakela

      Ever so optimistic! Let's hold your feet to the fire, Professor Stiglitz and let's see how well Japan performs over the next year, two or three years down the road.

      I think that a better policy would be for Japan to tighten spending and end the infrastructure profligacy and reduce its personal, VAT and corporate income taxes by 30% or more. Let the people decide how to spend their money and stimulate private sector growth that the same time!

      In fact, if a loss of confidence results in a destablized currency in Europe, Japan, Switzerland and the U.S., we can blame you, your colleague at Princeton and Dr. Bernanke for this massive, untried experiment in monetary easing.

    10. CommentedMarco Cattaneo

      Kuroda "saw firsthand the failure of the conventional wisdom pushed by the US Treasury and the International Monetary Fund". Right. Unfortunately this failure is currently being replicated and surpassed by the European Union.

    11. CommentedDouglas Carr

      A big problem for Japan is that, at the zero bound, monetary policy loses its effectiveness. The JCB (and the Fed) are like ships that have lost steerage; they can hammer the rudder all they want, but it will produce nothing. 20 years of Japanese experience with massive deficits, zero rates, and subpar growth, along with 5 years of our own experience with the same, demonstrate these are failed policies.

    12. CommentedDavid Boudreau

      You write that deflation increases debt burden and real interest rates. Wouldn't it be more accurate to say that unexpected deflation has those effects? In Japan, after so many years of deflation, one would think that deflation is no longer unexpected and that much of the existing debt burden already takes mild deflation into account. It is Abe's plan to cause inflation that adds the unexpected component that will decrease debt burden (by robbing savers). It may temporarily lower real interest rates, but they can adjust very rapidly to anticipated inflation.

    13. CommentedLee Hubbard

      You write: "...the effect of even mild deflation on real debt, year after year, can be significant." Just what effect do you think "even mild" inflation can do to a private person's savings? Nowadays, to save and invest for a home, college, or retirement entails a running battle with the government to prevent devaluation of one's funds through inflation. Even 2% inflation over the time it takes to amass money needed for life's major expenses is a major difficulty to surmount. Of course, governments like to pay off their debts through inflation, but that's an insidious tax that most people don't understand.

        CommentedROBERT BAESEMANN

        US average annual inflation rate since 3/3/2008 is 1.75%. Since 3/1/2008 the CPI has risen by 9.1%. Hubbard thinks that "Nowadays, to save and invest ... entails a running battle ... with the government to prevent devaluation of one's funds through inflation.” A bold proclimation on behalf of no one living in the US where the inflation rate is 1.75%. (“Nowadays” seems to indicate that Hubbard is speaking here on behalf of the common folks.)

        Even worse, Hubbard steps up for the common folks and says, “Even 2% inflation over the time it takes to amass money needed for life's major expenses is a major difficulty to surmount.” Fisherian interest rate theory and years of empirical observation tell us that the common folks can put their savings in CDs, which pay interest at rates that cover the expected rate of inflation. Hence the common folks are doomed or saved by a system that returns on their savings the natural or real rate of interest. The current yield on 10 yeat Treasuries of about 3% seems to be that rate, which is all the common folks realize in real terms regardless of the inflation rate.

        So Hubbard’s thoughts are really concerned with bankers who steadfastly maintain that they cannot cope with any inflation at all. There really isn’t a soul out there who couldn’t easily cope with inflation rates of 4% to 7%. Everyone who has been an adult since 1975 has done this, and we all know we could do it again. Bankers do not know that that they prospered through inflationary times in the past, but who cares about bankers who don’t even understand their own business.

    14. CommentedR Lubman

      Only an academic could think that it makes sense for a government to buy 10 year notes at a 53 bp yield in order to create inflation at a 2% rate. In a highly indebted country a policy that unsophisticated people can see makes ZERO common sense could destabilize the country. Mrs. Watanabe could see that her savings are being confiscated by her government and moves her money out of JPY to protect her life savings.

      The policy is a favor to those hedge funds who have massive JPY shorts and are long Japanese stocks. Japanese individuals do not have an equity owning culture, and own ~ 20 % of the total Japanese stock market, so they don’t benefit. (see p.90 - )

      The policy will increase inflation on traded goods. Due to the weakening JPY, imported energy will cost more. Because of the shutdown of nuclear plants post-Fukushima, this cost is not trivial. Japanese citizens will not run out to buy manufactured goods, because the deflation from reduced costs and annual technology improvements are still in place. The psychology of a retiree, when his fixed income is being reduced through increased inflation AND reduced interest income, is not to go on a spending spree!

      What must be understood is the demography of Japan. See –

      This is what is important!

      Japan needs to reduce their xenophobia and allow immigration into their country. That is the only solution to their economic problems.

    15. Portrait of Pingfan Hong

      CommentedPingfan Hong

      For a developed economy, with output per worker growing at annual rate of 3%, higher than other developed peers, unemployment rate at 5 %, lowest amond developed countries, why should people be concerned about a decline in prices? Why Japanese government wants to stimulate further?

    16. CommentedJoshua Ioji Konov

      Excellent comprehension. however the Prime Minister ABE's effort will have a positive long-run effect only if the transmission-ability and market security of the Japanese market could accommodate the extra liquidity and fiscal stimulus policies, other words, if the trickle-down economics is used by the result could be disastrous, but if some innovative methods of enhancing fairness of competition to promote small business and investors in a free market competition the results of His policies could be very positive for Japan.....

    17. Portrait of Michael Heller

      CommentedMichael Heller

      A comical piece. The idea that Japan (debt nearly 250% of GDP with one-quarter of its budget sacrificed to debt servicing) and its chronic autarkic institutions (gravity defying moribund semi-democracy with excess legal rigidities) should be the example for Europe is quite funny. Japan will be retrying policies which failed previously. Meanwhile the institutions prevent structural reform.

      The Japanese arrow proverb is well know. For Japan, however, and for Keynesians and socialists, I think the Chinese arrow proverb about moral hazard is apposite -- “It’s easy to dodge a spear coming at you from the front. But you must be well prepared for the arrow that comes from behind, since that one is very difficult to avoid”.

      Japan’s new policy might likely help increase the size of the debt, giving all unforeseen arrows an even more gigantic bubble to pop.

    18. CommentedTomas Kurian

      The monetary stimulus of such scale can be unnecessarily high, the size of it stemming from supporting supply side only again. Surely some of it will get translated to aggregate demand, but only a smaller portion.

      If there is a real need for infrastructural projects, than sure go for it. But just to unleash such spending to support inflation seems as a waste.

      The better way would be to provide stimulus directly to the demand side, by supporting wages in the form of wage supplements(by government), family support ( as is badly needed especially in the case of Japan, where there is lack of young people)

      In my theory ( ) I am showing an alternative to blind money printing in the form of new capital tax, in connection with fully digital financial system.
      It would provide better tools for stimulating demand, without the need to forever keep increasing monetary base or ever growing debt. Chapters 16.-18. are describing in particular how it should be constructed and benefits it would provide. It would also provide methods of growth without inflation at all, so size of monetary action needed would be only fraction of what is planned now.

      I believe that Japan, as highly organized country with strong social model of society would be capable of implementing it.

    19. CommentedProcyon Mukherjee

      Japan is a case significantly different from many developed countries where two things stand out:
      1. High debt, but almost entirely held domestically
      2. Low unemployment rate as the current figures show (Unemployment rate since 2010 has been in the region of 4.1% average although Japan's seasonally adjusted unemployment rate rose to 4.3 percent in February from 4.2 percent reported in January. The jobs-to-applicants ratio was steady at 0.85 in February, the same level seen in the previous month, which was the highest since August 2008. The number of new job offers rose 1.5 percent in February from the previous month and increased 4.7 percent from a year ago.

      These two positives make a solid foundation for Abenomics to take shape.

    20. CommentedSiddhartha Sharma

      Everything seems to work well but I don't see how any of these three tools could help reduce Japan's perpetual and huge public debt (way above 200% of its GDP) or you don't see it as an issue at all? However, there have been attempts recently not to worsen the situation by operating through almost balanced budget and trade.

    21. Commentedphlegyas 1404

      In my opinion, regardless of whether one believes increased public spending can be a solution to Japan's problem, the way the additional expenditures are currently earmarked can hardly be called optimal: Abe has allocated about $100bn to infrastructure investments.

      That represents 25% of yearly worldwide infrastructure investment needs, according to the OECD (Reuters story here:

      It might be wise to allocate capital to other industries, where hopefully the jobs created would be long-term jobs.

      And anyway, I consider doubling the monetary base to be a wild gamble. Especially when that surprises markets.