What is the aim of Abenomics?
Abenomics is essentially two things. One is a policy thrust to end Japan’s chronic deflation. The other is a policy thrust to try to raise real growth. The approach to ending deflation is a very aggressive monetary policy. Abe was able to engineer that because he had the opportunity to replace the governor of the Bank of Japan and the two deputies.
Abe has marketed his economic policy program as having three “arrows”:
a plan to end deflation and combat the strong yen;
“flexible” (that is, somewhat expansionary) fiscal policy management for two to three years; and
a growth strategy, centring on deregulation and attempts to promote innovation and improve industrial competitiveness (structural reforms).
The aim, after years of deflation and low real growth, is to achieve 2% consumer price inflation and 3% nominal GDP growth. These are ambitious targets. Japan’s consumer price inflation has averaged -0.3% (average monthly year-on-year rate) during the past 15 years and nominal GDP growth has averaged -0.6% (average quarterly year-on-year rate).
What is the most significant part of Abe’s policy?
It’s really a very conventional policy mix: end deflation and try to raise growth through structural reform. Every administration says they want to do the latter. It’s really the former — ending deflation — that is in substance most significant here. What is revolutionary is that the previous governor of the Bank of Japan said, in effect: No, you can’t do it. Or, the way to do it is through structural reform.
Abenomics has structural reform and reflation as the two thrusts. It has decoupled the two, whereas they were linked under the previous administrations’ thinking.
Do you think this might reverse the country’s economic stagnation?
I am more confident that we’re going to see a change in the macro atmospherics in Japan through reflation, because the structural side is just much harder to do, and it takes longer. Governor Kuroda has surprised the world with his clear and decisive communication and bold policy action. He has come in and said: I can do this. Give me two years. And he has greatly simplified the framework.
But brave words need to be backed up by very aggressive action. And the announcement that they will double the monetary base, double the duration of the Japanese government bond (JGB) portfolio, double the amount of risk assets and — if that’s not enough — do more, is certainly setting sail in the right direction.
You’ve given a thumbs up to Kurodanomics, but will it be enough?
A reality check suggests that the policy action is perhaps not quite as aggressive as it might seem. Whereas other major central banks such as the US Federal Reserve and the Bank of England have implemented aggressive quantitative easing (QE) in order to counter disinflationary forces and mitigate the tail risk of deflation, the BOJ is trying to lift the economy out of a deflation that has continued for 15 years. That argues for much more aggressive policy action than that of other central banks.
The doubling of the monetary base sounds aggressive and, at one level, it is. But even after it occurs, the degree of expansion of the balance sheet, relative to before the outbreak of the crisis (in September 2008) — an estimated 165% increase — will be less than what the Federal Reserve and the Bank of England have already implemented (about 275% and 333%, respectively). Kuroda starts from way behind the curve.
Is next April’s slated consumption tax hike a litmus test for Abenomics?
Yes. The government needs to decide by this year’s fourth quarter whether to press ahead with the mooted tax hike. The stance Abe takes on this question will reveal a lot about Abenomics and where it is likely heading — to a durable atmospheric change in Japan’s macroeconomic performance or to the sinking feeling that, appearances to the contrary, Japan’s policymakers haven’t yet kicked their habit of making policy errors.
It would seem more consistent with the spirit of the second policy plank of a “flexible” stance, and with the commitment to end deflation, to delay the implementation of the consumption tax hikes until it is confirmed that the battle against deflation has indeed been won. Otherwise, if policymakers put one foot on the fiscal brakes while they are pushing the monetary accelerator to the floor, they risk stymieing the attempt to end deflation. If Abe is his own man, and has the courage of his convictions, it would make sense for him to call a timeout on the consumption tax hikes, as is allowed by the legislation, and is required if the economic outlook is deemed not to be sufficiently rosy.
It also remains to be seen whether Abe can and will implement (real) growth-enhancing measures, commensurate with the scale and potential significance of the monetary policy changes (the third arrow). What can be said is that, unlike reflation, structural reform is not a single, well-defined concept. It is multifaceted, amorphous and, because of vested interests, difficult and time-consuming to implement. It is also potentially very slow to yield tangible economic benefits.
We are closely watching developments to see whether fiscal and monetary policy can work together to boost the long-somnolent Japanese economy. The combination of structural changes and aggressive monetary policy has marked a dramatic shift from the recent past and could, if successful, boost domestic spending and reflate the economy. The risk, however, is that Japan could end up a much more heavily indebted nation.
Paul Sheard is the US-based chief global economist for Standard & Poor’s. He has spent 17 years of his career in Japan.
The views expressed here are those of Sheard. While these views can help to inform the ratings process, sovereign and other ratings are based on the decisions of ratings committees.
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