Economic Development of Japan No.14 Abenomics Aggressive monetary policy Flexible fiscal policy New growth strategy LDP.

Economic Development of Japan

No.14 Abenomics

Aggressive monetary policy

Flexible fiscal policy

New growth strategy

LDP

Deterioration of Japanese Politics?

• Between Koizumi and Abe2, there were six PMs in 6 years.

• LDP (Abe, Fukuda, Aso: 2006-09) was unpopular leading to the change of government to DPJ in Aug.2009.

• DPJ (Hatoyama, Kan, Noda: 2009-2012) proved even worse than LDP; random policies and amateur politics.

• A shift from “1955 Regime” (LDP’s political dominance) to alternating two-party competition was not realized.

• Abe2: win popularity with Abenomics, then push defense-related conservative agenda (Article 9 of Constitution, SDF, Okinawa)

Liberal Democratic Party (LDP) 1955-2009(except 1993-96)

Democratic Party of Japan (DPJ) 2009-2012

Koizumi 2001-2006 LDP Abe No.2 2012-

Second Government of Shinzo Abe First Abe Cabinet (Sep.2006-Sep.2007) was unsuccessful. Second Abe Cabinet (Dec.2012-) has the following features:

Active, quick, and vigorous (compared with past PMs). Politically conservative (critiques say “right wing”):

business interests, active defense. Broadening the interpretation of Constitution (Article 9)—

instilling nationalism, more military possibilities. Diplomatically active (foreign visits, top sales, coping with

China, etc.)—but promises are not properly followed up. Abenomics for ending deflation and reviving growth.

High popularity + weak oppositions = LDP’s free hand Economic recovery is welcomed by businesses With gained popularity, Abe now shifts to his “right wing” agenda—but they are not so popular among people.

Dominance of LDP-Komei Coalition

Ruling party coalition has majority in both Houses due to weak & fragmented opposition; it can force any law after debating it formally & superficially in the parliament.

The term of The House of Representatives is four years; last election took place in Dec. 2014.

The term of The House of Councillors is six years with half elected every three years; last election took place in July 2013.

Three Arrows of Abenomics

To revive the economy, three “arrows” are mobilized.

1. Aggressive monetary policy (“New Dimension”)- PM Abe appoints BOJ Governor Haruhiko Kuroda (Mar. 2013)- Dispel deflation mindset: inflation target of 2% within 2 years- Monetary expansion with new asset purchases (REIT etc.);

doubling monetary base & gov’t bond holding in 2 years- Correction of high yen (done, or overdone)

2. Flexible (=active) fiscal policy- Revive economy first, consolidate budget later- Increase infrastructure investment

3. New growth strategy (cabinet approval in June 2013; another cabinet decision in June 2014; another in June 2015)- Japanese Economy Revitalization Headquarters (under it:

Industrial Competitiveness Conference)- Initially, 3 roadmaps and 3 plans (12 pillars – 37 items – 56 sub-

items)

Source: Japan Revitalization Headquarters, PM Office

Supporters of Abenomics (2013)J. Stiglitz—“Depreciating yen to end deflation is the right policy.

Just as I recommended 10 years ago.”Paul Krugman—“I evaluate Abenomics highly; no other country

could do this policy mix.”IMF Managing Director Lagarde—”Inflation target of 2% is

desirable as long as central bank independence is secured.”Fed Chairman Bernanke—“I support it as a policy to end

deflation.”Prof. Heizo Takenaka (Keio Univ.)— “Abenomics is 100% right.”Prof. Koichi Hamada (Abe’s advisor)— “Don’t worry about recent

stock market drops—they are just corrections of excess optimism. The real economy is improving.”

Prof. Takatoshi Ito (GRIPS)— “BOJ economists think QE is ineffective. But many researchers and officials support QE as a tool to change inflation expectation.”

Critiques of Abenomics (2013)George Soros (investment guru)—”Japan’s monetary policy is

bold but very risky; it may trigger a collapsing yen.”Prof. Kunio Okina (Kyoto Univ.)— “If deflation mind is dispelled

but fiscal discipline is not secured, monetization of fiscal deficit will generate a serious dilemma between financial stability and price stability.”

Kazuo Ueda (Tokyo Univ.)—Monetary expansion increased interest & yen volatility. If long-term interest rates rise, expected positive impact on real economy will not happen.

Ryutaro Kono (BNP Paribas)— “The monetary transmission mechanism is broken. Under such circumstances, monetary expansion may destabilize asset prices, raise long-term interest rates, and put BOJ in a macro policy dilemma.”

Nikkei Newspaper commentary—“The growth strategy lists only easy measures; bold reforms in such key areas as medical service, agriculture, corporate tax rates, etc. are not clarified.”

Call rate (interbank short-term interest rate)

Money & bank lending

Excess reserves are built up at commercial banks during zero interest rate periods

Bubble

Zerointerest

ratepolicy

Zerointerest

ratepolicy

Lehman Shock

My View on Abenomics (2013) Compared with DPJ’s total impotence, Abe is doing much

better. He has brightened Japan’s short-term psychology—but that is not enough for long-term growth.

A policy mix of fiscal, monetary and growth policy is nothing new; but Abe’s policy presentation is innovative.

Growth policy is central, while fiscal & monetary policies are supplementary. New industries must emerge, then macro policies should support them. Abenomics is strong in fiscal & monetary areas, but growth policy remains weak & random.

If long-term interest rates start rising, government will be completely bankrupt.

Pumping money into a broken transmission mechanism risks asset bubbles and financial instability. Market psychology is unpredictable and BOJ cannot control what will happen.

Proper policy procedure is not followed: there is a disconnect between visions and listed actions.

Global & nationalliquidity glut

Bank of Japan

Consumer durables

Stock market

Governmentbonds

Real estate & REIT

Preciousmetals

Energy & commodities

General goods &services

US & EU

Foreign money & assets

(F/X instability)

Investmentin emerging

marketsQuantitative expansions

Aggressive monetary policy

Global and national good & asset markets

Driven by unstable market

psychology; unpredictable

direction & timing

Pumping money into an integrated world is risky.

Inflation target of 2%

(US Fed: trying to end QE3 gradually)

Studies & surveys

Brainstorming

Top leader

Set broad goals &

direction

Draftingwork

Businesses Ministries ＆ agencies

Academics & consultants

Comments& revisions

Finalize& approve

Regions & localities

Stakeholderconsultation

1. Vision

4. Substantive stakeholder participation

2. Consensus building

3. Documentation

Standard Policy Making Procedure(Five Necessary Conditions)

The entire process should take about 1 year for policy revision and 2-3 years for new policy

5. A secretariat with sufficient authority andresponsibility to coordinate the entire process

(Drafting may be outsourced)

Growth Strategy in Abenomics Broad visions are given (three arrows, three plans, etc.) but

they are not new—contents are basically the same as past ideas of previous governments.

Concrete growth measures were presented too quickly without deep consultation with stakeholders. They are just a collection of various ideas proposed by committee members and officials in charge.

Visions – (targets) – (policy areas) – random actions? Growth Strategy is a loose wish list, not an action plan. Easy

ones are implemented first without specifying prioritization, required results, timing, budgeting, etc. Because the list is broad & unsurprising, it can cover almost any policy.

A special budget of 3 trillion yen was announced (July 2014). Ministries try to get more funding by proposing something related to Growth Strategy. But this may worsen the scattered and passing nature of proposed measures.

Growth Strategy in the Second Year: “Implementation Stage” (2014) Cabinet approved 124-page “New” Growth Strategy (June 24,

2014) but it is still a wish list of ideas without consultation or action plans. PM Abe now declares an implementation stage.

Added policy areas: Recovering an earning power—corporate tax cut (to 29%?

welcomed by businesses); corporate governance; tripartite convention; investing pension funds in equity market

Producing workforce—demographic targets; childcare facilities; reform tax deductions; mobilizing foreign trainees and domestic workers

Reform rock-solid regulations—revise work rules; medical reform; organizational reform in agriculture

Energy—restart nuclear power, electricity reform, etc. Tourism—easing visa requirements for ASEAN people, etc.

Comments (2014)Prof. Heizo Takenaka (Keio Univ.)— “New Growth Strategy is better

received abroad than a year ago.”

Japan Economic Journal (June 30, 2014)— “This is the 9th Growth Strategy of the Japanese government since 2001. None of the past Strategies produced results. Their contents were more or less similar: job creation, special zones, creating demand for environmental or medical industries, hiring young workers, etc. Short-lived governments had little time to work on policies. Subsidies were usually wasted. Ministries were happy to report new spending, but there was no monitoring of effectiveness. Unproductive policies must be ended. Money and policy must be directed to fewer programs.”

Abenomics in the Third Year:“Stage Two” (2015)Cabinet approved “Revised Japan Revitalization Strategy 2015” in June 2015. [Annual minor revision may continue without any substantive change in methodology.]

PM Abe on June 24: “The economic virtuous circle that emerged this year [rising profits & wages] should not be aborted. We must continue this momentum to revive all micro, small and medium enterprises. We must deliver the fruits of economic recovery to all over Japan. That is the mission of Abenomics, and all hinges on the implementation of Growth Strategy. Today, we boldly sgrengthened Growth Strategy.”

Note: critiques say Abenomics has benefited largefirms & stock investors, but has not reached SMEs orrural areas; income gaps are widening.

PM Office’s Summary (Source: PM Office homepage, June 2015)

“Corporate profits and wages are rising but investment remains low. Investment is key to productivity growth.”“Many concrete policies have already been decided and executed under Growth Strategy with unusual speed (i) Agriculture sector reform (ii) Health sector reform (iii) Energy market reform (iv) Labor market reform (v) Pilot initiatives in special zones.”“Government will strictly monitor & check key performance indicators (KPIs) and continue to flexibly revise policies and policy groups.”

“Abenomics Stage 2”(Source: PM Office homepage, June 2015)

PART I--Productivity revolution through investment for future1. Promote investment & earning power 1/ Further corporate governance reform—productive dialogue with shareholders, corporate tax reform, public-private dialogue 2/ Innovation ventures—create Japanese Silicon Valley, competition among universities 3/ High-quality infrastructure for Asia and other growth markets

2. Accelerate new-age challenge (4th Industrial Revolution) IoT, big data, artificial intelligence, cyber security, My Number system

3. Strengthen potential of individuals Reduce working hours, use female & aged labor, customized career development, new TVET institutions

“Abenomics Stage 2” (cont.)PART II—Local Abenomics Absolutely increase earning power of medium, small & micro enterprises; effective publicizing of support measures Activate and increase productivity of service sector: local bank support, productivity movement through PPP, use of IT, business benchmarking Mainstreaming agriculture & fishery, medical & age care, tourism

PART III—Reform 2020: PPP projects for growth Auto-drive car, hydrogen society, frontline robots, tourism management, inward FDI

No methodological change and only minor content change from the first year. It is an average, not spectacular, reform effort.- Too many flashy words with no concrete targets, medium-term budgeting, etc.- Still a random wish list with annual modification (“flexible revision”)- Ministries have incentives to propose projects listed in Growth Strategy items without scrutinizing effectiveness.

2% Inflation Target to Be Missed

Consumer Price Inflation (Excluding Fresh Food)

Note: two lines represent different technical methods of splicing indices.

Base 2010

% change over previous year

[But is inflation caused by weak yen & high imported prices really good for the Japanese economy? Is inflation targeting desirable? Effective?]

BOJ’s target

Budget Improves as Revenues Rise Strong profit pushes up corporate income tax receipt. Consumption tax raised from 5% to 8% (April 2014). Government leans toward more spending than fiscal

consolidation.

Level of dependence on JGBs = Borrowing _____ Borrowing+Fiscal revenue