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Japan´s monetary revolution

Escrito el 14 Abril 2013 por Mikel Aguirre en Economía Mundial

Japan has been under deflation for almost two decades. Many economic politics had been taken with little or no result so as to increase demand.  The new central bank governor announced a new phase of monetary easing by doubling the size of the money in circulation in two years.  Japan has given new meaning to well known economic concepts such as “the lost decade” or “liquidity trap”.  The later returned to prominence when Japanese economy felt, more than twenty years ago in a period of prolonged stagnation.  When the official interest of a central bank is zero the monetary policy has a really narrow margin for increasing the economy.  The Central Bank of Japan (Boj), has been for long the world´s most cautious central bank so this movement means a change for a target of a 2 per cent rate of inflation after 4 years with a yearly average inflation of zero.japan

There is a political side of this bold movement: The country had seven different prime minister in seven years and this looks like the new government is massively involving itself in the affairs of the central bank.  But this is not ecompletely new as lately the same happened in UK and the FED had taken any possible decisions to maintain the interest rates low while high unemployment rates remain high.

These monetary revolutions focus in increasing nominal GDP and eliminate the ongoing deflation existing in the country.  How these measures could cohabite with the worsening of the public finances and the rampant public debt is something to be seen.  With a 90% of public debt held by domestic investors and a (high) national saving level of around 23% of GDP, the key issue will be to convince the national investor community.

Comentarios

Moacir Baracho 14 Abril 2013 - 14:44

For those who are not aware of LA’s economic developments in the past, I apologise to raise an issue directly related to Brazil’s inflation battles, but it is just to use as example to cover a broader topic. Anyways… #14 and #3. Key numbers in Brazil’s economic history. 14 represents the number of finance ministers we had from 1980 to 1994 (14 years interval), believe it or not… I relate that to Japan’s “seven different prime ministers in seven years”. This specific part of the argument made by prof. Aguirre caught my attention. I wanted to comment on the influence of “short-term -focused politicians” in economic policies. This is maybe one of the main reasons why most economic policies used to fail big in Brazil, and I guess in many other countries. Nowadays, our ministers and CB presidents are relatively more independent, and it helps. I do believe that the short-term issue may not be the problem in Japan, but I think that political instability isnt helping… The interesting part is that the economic turmoil in Japan is to try to trigger spending, and raise inflation, while in Brazil’s case, the battles that left many dead finance ministers and CB presidents on the way were aimed at fighting our huge inflation rates…The other number, 3, represents the number of finance ministers we’ve had since 1995 (18 years interval)… And, although not in top form, Brazil is doing much better… coincidence?

Remy van Nieuwenhoven 15 Abril 2013 - 00:22

The new 2 % inflation-target is the smartest move of Japan of the past 25 years.

As long as savers are rewarded more then risk-takers in an economy, any sensible person bets on saving. On a macro-economic level, this slows down the economy.

With a positive inflation, savers are punished and risk-takers investing in the real economy are rewarded. In my idea, the ideal inflation is 5 %, what is a balance between price-stability and rewarding the risk-takers vs the savers.

(Limited) inflation is the best stimulus for an economy ……. and it is free of cost !

Remy van Nieuwenhoven

The Netherlands
http://www.bista.eu

Alvaro Butragueño 15 Abril 2013 - 08:48

What I’m wondering is because no prime minister has taken this series of steps before. Japan has been hampered by a flat economy over the last 20 years. Professor, do you think that is a move in the short term will be popular but unpopular in the long run?

Eduardo Aquiles Farias Hansen 15 Abril 2013 - 12:52

According to author Martin Wolf on his Financial Times article ¨Japan´s unfinished policy revolution¨, the current decisions taken to target a 2 per cent rate inflation after 4 years with a yearly average inflation of zero is a short term decision, which can lead to ultra inflation and going from one extreme to another, stopping a short time at a middle balance healthy point. Wolf understands that the answer is to recognize that the problem is structural, he understands that Japan has a dysfunctional corporate sector, below see his proposed solution to the problem:

¨It follows that Japan desperately needs structural reform – but not just any structural reform. It needs reform that both lowers excess corporate savings and increases the trend rate of economic growth. This combination should be possible, since Japan’s GDP per head (at purchasing power parity) is down to 76 per cent of US levels and its GDP per hour to just 71 per cent. The policy options include: a huge reduction in depreciation allowances; a punitive tax on retained earnings, possibly combined with incentives for higher investment; and reform of corporate governance, to give more power to shareholders. The aims would be to deprive companies of the cash flow cushion that has featherbedded inefficiency. The worst possible tax rise is the one on consumption now planned, since Japan consumes too little. Tax corporate savings, instead¨
http://www.ft.com/cms/s/0/2d7cc812-a079-11e2-88b6-00144feabdc0.html#ixzz2QWmWUJ5E

Jason Sigler 16 Abril 2013 - 13:00

I’d like to bring up a problem so to say with this QE strategy. While I believe domestically it can have very powerful and very profound effects, it also could potentially cause some international concerns. A byproduct of QE, naturally, is the depreciation of ones currency relative to others. In cases like Japan, which is an export-oriented economy, this would inherently have positive effects for the local market. However, as we’ve seen with the US’s QE program as well as Japan’s program, these actions do not occur in a bubble. When the US started doing QE, it made China quite angry, simply due to the fact that all of the Chinese investments in the US would likely decline relative to their previous position. Naturally, what is going to happen with Japan is bit different… however we’ve already seen some of its effects.

First and foremost, the Yen has depreciated around 20% vs. the Dollar since the last year. While this could hurt the trade balance for some Western countries, the biggest damage has been in East Asia with the four Asian tigers. Korea, which has produced quite low numbers as of late, just today announced a 17.3 trillion won stimulus package. Likewise, Korea has historically used managed float techniques in the past, and it is likely that the other three will end up doing some combination of fiscal and currency policies in order for their exports to remain competitive verse Japan’s exports. Therefore, this will quite possibly cause a spiral in East Asia that will in the end benefit no one except perhaps Western importers.

This sort of action just goes to show that the Prisoner’s Dilemma is alive and well within international macroeconomic policy.

Alejandro Alvariño 16 Abril 2013 - 13:53

This move comes pretty late. Japan have been suffering deflation for so many years. Luckily, it´s better to make the right move later than don´t do it. Also, the great GDP growth of their asian´s neightbors, specially China would help Japan in order to return to the right path.

Young Chul Lee 16 Abril 2013 - 18:41

As I mentioned earlier in the other blog, monetary easing of any kind has proven to be very effective in changing financial market sentiments at this juncture. But the question is whether it could go beyond a mere equity market rally? In other words, could money creation happen through a multiplying process in debt/loan markets? Money supply through quantitative easing initially provides banks with liquidity necessary for lending, but the liquidity in the banking system does not automatically multiply itself through the system without borrowing needs or demand from corporates and households. People do not borrow just because they are able to borrow. Monetary policy has its limitation here; it does not work without solid demand or desire to invest or consume in the real economy.
Despite some positive signs, Japan doesn’t seem to be fully recovered from post-bubble syndrome created during the NPL disposal process. Corporates that once invested a lot in the property market are still unwilling to borrow or invest. Classically, it is fiscal expansion rather than monetary easing that should be more viable in this circumstance even with huge government deficit at present. The fact that most of its public debts are held by its domestic investors also gives some leeway to further government spending without exposure to external balance pressure.
Therefore, pressure on the central bank alone, without a fine mix of fiscal expansion, may not work, even though financial markets responded positively to the new Prime Minister’s overture.

Maresuke Tanaka 17 Abril 2013 - 20:23

Although there are some potential problems, I’m positive for the recent measurements Japanese government and bank of Japan (BOJ) took. At least they are taking drastic actions which no one could not take in this 20 years. Actually the inflation rate of 2% in two years is a bit challenging, but I believe that the governor of BOJ expects the psychological effect. As Eduardo says this is the first step for raising inflation rate and the measurements are almost all that BOJ can take. From now Japanese government and the industrial side have to take actions for restructures. For example, the government has been requesting to increase salaries to major companies. (I like it!) And the increasing number of companies accepts this proposal. This will correct the unbalance of saving between companies and individuals. Another example is that Japanese government attended a meeting with a new economic organization which is consisted of IT and Internet companies. For long the largest but old economic group called KEIDANREN, which is consisted of large enterprises like Toyota and Mitsubishi, majorly has the connection with the government. However, government recognizes the need of stimulating the economy with those new industries. I hope these actions work well.

Susila Cherla 18 Abril 2013 - 02:05

I want to highlight the impact on Yen because of lack of political and economic stability. Japanese yen lowered against all of the major currencies. This is after bank of Japan’s announcement of target of 200 yens by the end of 2013 in base money stock on April 4th under the new term “quantitative and qualitative monetary easing (QQE). Bank of Japan’s effort to boost inflation to 2% within two years and stimulate consumer and business spending.This may benefit US and Japan’s economy thereby improving the global economy. However my thoughts will all these would really better the economy or will any political instability or natural calamity can impact the whole plan. Is the government thinking in that lines. Not to be cynical. What are the other alternatives to improve the overall economy. Many industries want to be more competitive, increase penetration by lowering prices. This will make Japanese products available for cheap. What would be the long term impact and Sustainability for this approach. How can Japanese Govt bring stability with the number of Prime Ministers. On the contrary if the economy goes up quickly, inflation would increase and it would impact consumer spending. A stable approach has to be done by bringing all the agencies together.

Moacir Baracho 19 Abril 2013 - 11:56

Following up on some comments above, it is in the news today that Japan has kind of gotten a green light from the G20 to its recent changes in economic policies. The Yen will likely drop even further. Currency wars may come alive in Asia, especially with Korea feeling the pressure. What could this mean to the world economic recovery?

Sandra Keller 19 Abril 2013 - 21:49

They say if something continues to not work, then try something different! Japan is heeding this advice by taking on a new and radical approach in reducing its 2 decade fight with high inflation rates by introducing a bold monetary policy which aims to reduce its inflation rate to a mere 2%. By buying up long-term bonds, and doubling the amount of money currently in its circulation, Japan hopes to affectively reduce the value of its Yen. This will yield positive results when it comes to its exports which will translate into positive growth for the world’s third-largest economy. As we know, what affects Japan directly affects the global economy, particularly with its neighbor and leading competitor, China. Taking decisive action to change its exchange rate will empower Japan in terms of its exports. By driving its Yen lower will also be largely felt in the foreign exchange market, and the ripple affect will play out (in the short term) to its advantage. There are debates as to what this will mean for Japan in the long term. Japan may be a bit late in reacting to a problem that has gripped its country for close to twenty years, but as they say… better late than never. Japan’s trading partners may not be happy about these latest developments, but this is good news for Japan. As a major exporter, the weaker Yen means Japanese products will be more competitive and affordable in the global market giving Japan a chance of gaining economic recovery, something that has eluded them for far too long.

Guru 20 Abril 2013 - 16:50

Interesting comments. We all seem to understand the pros and cons of QE very well. While it has worked in increasing liquidity, inflation and hence stimulating the economy, in certain countries. I do not feel that QE provides the solution for Japan.
As we discussed in class, Japan reached such a state because of its bad policies, specially because it kept its currency pegged with the US$. What will get it out of this mess is good government policies and actions.
A 23% savings is a high rate. This shows the lack of confidence and opportunities that people in Japan feel. I am curious to know the current government debt to GDP levels.
I feel the government should start investing and increase its own spending. This will lead to an increase in GDP and this coupled with QE will help domestic investors, participate in the development.

Ana María Quintero 22 Abril 2013 - 16:01

@ Moacir. Indeed, The Yen depreciation triggered by the policy has seen today much more. The Yen has weakened toward 100 to the dollar.

@ Guru. The current government debt to GDP level is 219%. I am not so sure how with this huge debt levels the government can increase its own spending. But what is true is that structural reforms are well needed.

The G20 has given green light to Japan’s efforts to stop deflation and increase domestic demand. However, longer-term concerns are still there and I believe structural reforms are needed. Kuroda’s monetary policy is a short term solution but steps to restore fiscal health are much needed to put the economy back on track after the “lost decade”. For sure the G-20 was in a debate on fiscal rectitude by the question of whether Japan’s monetary easing, done which such high levels of debt will weaken its fiscal discipline. In the next days, Japan for sure will have international pressure to have more steps to fix its public finances in order the last policies to not get into the world’s eye as a mere expedient to push the yen lower.

The IMF division chief for Japan, Stephan Danninger, suggest some of the key elements that the proposed structural reforms need to include. It is interesting that some of them include some of the comments above in this blog:

• Further Japanese integration with Asia, including participation in the Trans-Pacific Partnership.
• Measures to encourage higher labor participation especially by women, elderly and immigration.
• Domestic market reforms aimed at increasing competition and productivity.
• Promotion of more risk-based allocation of credit to encourage sustainable growth and encouraging domestic deregulation.

Young Chul Lee 22 Abril 2013 - 21:58

Structural issues in Japanese economy are roughly two; its demographics and employment. The aging population will increasingly pressure up on pension fund and health care cost. Continuing employment quality deterioration has been painful for the country that once boasted ‘life-time’ employment, inducing ultra-conservative consumer behaviors.
Therefore, what Japanese economy needs now is reviving solid consumption base and corporate investments. A series of recent measures that Maresuke mentioned above are quite encouraging in that sense if they are true. Contrary to what IMF usually recommends, fiscal expansion still makes sense for Japan, even with more than 200% of Public debt to GDP ratio, at least for two reasons.
As indicated in the professor’s initial comment, most of the public debts are held by its own citizens, not by external lenders. So, a sovereign debt crisis we are seeing in some of Eurozone countries won’t happen in Japan. Criticism or concerns over the sheer figure itself are therefore misjudgments or lack of understanding in details. Seeking fiscal soundness may be desirable for the economies that heavily rely on international capital but not for Japan at this moment.
Secondly, further monetary easing has been tacitly agreed by major economies that have been taking similar steps for recovery, as continuous JPY depreciation shows it. This means that Japanese government can afford very cheap fiscal stimuli contrary to the common norm that highly indebted countries should pay extra spreads.
In sum, Japan can afford to take bold moves fiscally for its economic recovery despite some criticism on its debt level.
It is a bit off what I have talked so far but I cannot resist but clarify. Some people seem to think that Japanese government deliberately intended for the currency depreciation in order to export out of recession. But I don’t think that is the case here. Rather, it is market perception on the tacit agreement I mentioned above that is leading the depreciation JPY. I’d like to remind everyone that JPY is a free floating currency whose price is determined by supply and demand in the market, even though there had been some historic interventions in the past: Plaza accord in 1985 and Louvre Accord or reverse Plaza in 1987 were international coordination among central banks in the major economies.

Juan Esteban Cabal 23 Abril 2013 - 15:30

Deflation affects domestic consumption since consumers and business prefer to purchase less in order to wait for cheaper prices later on. For two decades Japan has suffered this effect, but also offsetting deflation by relying on debt financed government spending and the country’s exports. Government debt by the year 2012 rises to more than 980.000 trillion Japanese Yen, and the government still needs around 200 trillion of public works over the next 10 years. Is it sustainable in the future to continue raising public debt when the country has not been able to boost its internal economy? Take into account that in most countries public debt is held by foreigners and in Japans case more than 80% of its public debt is held by Japanese banks. Also, Japan’s exports have been weakening over the past year, mostly because of the effects of slowdowns in the US and Euro Markets and also by the strengthening of the Chinese and South Korean competition.

Seems that the strategy they have relayed over the past 2 decades isn’t sustainable any more, and the country needs to boost domestic consumption by taking the measure of doubling its inflation target.

Jason Sigler 24 Abril 2013 - 17:13

I agree with Young Chul that Japan is in an enviable spot still despite their high Debt / GDP ratio, mainly because of the reasons that were already mentioned (ability to borrow in their own currency, local nature of the debt, high demand for such debt, etc). In a similar regard, I think it is fair to argue that Japan ought to or should attempt expansionary measures given the situation. However, I do wonder if there is something inherently wrong within either Japanese banks still (NPL) or within the structure of Japan’s economy (failure of the flying geese paradigm, for example)

What can’t be neglected is that the rise in debt/gdp from 67% in 1990 to 220% today hasn’t brought with it many positives. Japanese political history is sort of amusing lately because it seems like every few years a new politician comes in with the right policies which inherently bring with it an expansionary fiscal and monetary policy. The “this time it will be different” mentality fits here as well. Now, I am as Keynesian as the next person, but at some point you have to think that there might be some other problems that haven’t been addressed. First it was NPLs, then the world market collapsed, and now the demographic changes are coming too. But what if there is simply something wrong with trying to rely on high-tech manufacturing at the same time that everyone else in East Asia is trying to do the same?

So yes, I do think that QE / Fiscal policies ought to be the correct solution; however I do wonder if it will work. The policies are a tad more aggressive, yes, but they surely aren’t new.

Maria Alejandra Herrera Vallejo 24 Abril 2013 - 23:04

As I had mentioned on the other blog, I agree with those who are not as confident about the quantitative measures taken by BOJ. Japan has attempted to use QE measures in the past and has not been successful in creating inflation, so unless they take additional measures like the ones many of you have mentioned, I do not see why this time it will be different. Nevertheless, we can all agree that convincing the national investor community is quite important. I came across a news article which is quite reassuring. As of last week, Japanese investors sold US $785 million of foreign currency-denominated investment trusts. But the good news is not that investors are trying to lock in profits, but that with the proceeds of these sales, they are investing in domestic assets. This is a good sign of confidence on behalf of investors. Although they have the ability to invest in foreign assets with higher yields, they are choosing to invest domestically. The rally in the Nikkei has also motivated foreign investors to purchase Japanese equities. Some banks even claim that for the first time in a very long time they have received calls from institutional investors interested in having a Japanese asset management firm.

So it will be interesting to see if this time it will be different…

http://www.businessday.com.au/business/japanese-investors-sell-off-foreign-currency-trusts-20130424-2ie6y.html
http://www.reuters.com/article/2013/04/18/japan-economy-capflow-idUSL3N0D508F20130418

Maria Alejandra Herrera Vallejo 25 Abril 2013 - 15:16

As I had mentioned on the other blog, I agree with those who are not as confident about the quantitative measures taken by BOJ. Japan has attempted to use QE measures in the past and has not been successful in creating inflation, so unless they take additional measures like the ones many of you have mentioned, I do not see why this time it will be different. Nevertheless, we can all agree that convincing the national investor community is quite important. I came across a news article which is quite reassuring. As of last week, Japanese investors sold US $785 million of foreign currency-denominated investment trusts. But the good news is not that investors are trying to lock in profits, but that with the proceeds of these sales, they are investing in domestic assets. This is a good sign of confidence on behalf of investors. Although they have the ability to invest in foreign assets with higher yields, they are choosing to invest domestically. The rally in the Nikkei has also motivated foreign investors to purchase Japanese equities. Some banks even claim that for the first time in a very long time they have received calls from institutional investors interested in having a Japanese asset management firm.
So it will be interesting to see if this time it will be different…
http://www.businessday.com.au/business/japanese-investors-sell-off-foreign-currency-trusts-20130424-2ie6y.html
http://www.reuters.com/article/2013/04/18/japan-economy-capflow-idUSL3N0D508F20130418

Funmi Odushola 26 Abril 2013 - 19:22

What Japan needs is an improvement in real economic growth. There have been suggestions of the asset buying program and buying back government bonds as the way out. In my opinion, this simply creates money from thin air. Okay maybe I am exaggerating a little but we know the outcome simply inflates the economy artificially.

Call me traditional but some of these theoretical policies don’t turn out to be as planned in the real world – the case of the UK for example shows, excess liquidity after the credit crunch did not encourage banks to lend out money and the Bank Of England is now considering negative interests rates to force lending and as YOUNG mentioned, what if consumers do not need to borrow and there is no demand for credit

I will not be too quick to follow on the QE or credit easing route (in the case of the US), as it is too early to tell and analyse the results for those countries that implemented them.

Austerity measures to contract the economy (government spending) naturally is harder but the long term effects are real and good for the economy. In the end, the economy will correct itself, so let’s see in the case of Japan how and when this happens

Gerardo Berea 27 Abril 2013 - 20:10

Experience has taught us that certain economic policies result in predictable economic outcomes but BOJ and other Japanese economic policy makers have tried hard for many years to increase the country’s GDP by implementing economic policies that should have brought growth without success. Many have argued that Japan might be showing the world that there is limit to economic growth just as there is a limit to any other type of growth. I personally agree with this perspective and even more with those that state that these 20 years of stagnation is not in fact the failure of bad economic policies, but a deliberate national choice based on Japanese values, geographic situation and demographics.

Julio Alejandro Saca 28 Abril 2013 - 20:14

It looks like the measure come a bit late after such a history of deflation but as the Spanish phrase says: “mas vale tarde que nunca.¨ It will certainly be interesting to see if the 2% targeted inflation rate is achieved in 2 years. The other side of the coin is certainly the depreciation that the yen will face and the way exports will behave in a economy that is so dependent on it. It seems most analyst agree that the measures are the corrects ones to take after trying all other economic policies. Hopefully, what Japanese were so skeptical about will now help them turn the situation around

Tshepiso Mohale 30 Abril 2013 - 21:33

The idea behind monetary activism to raise inflation towards the 2 per cent target is that this will boost private spending in Japan. Private spending will rise if people think saving money will provide a meagre return, a weaker yen encourages exports, and expectations that prices will be higher in future prompt a need to spend today. It also allows the government to borrow more without worrying about funding the resulting higher deficits and debt. As long as there is spare capacity in Japan, such a move would improve output and growth without sparking an inflationary spiral. But there are also doubts about the effectiveness of more quantitative easing in generating private spending, both domestically and abroad.

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