Intro Economy Ch5,6

Introduction to the Japanese Economy

• Japan's economy is a significant global player.
• The economy is complex and has experienced various periods.

Abenomics

• In 2012, the LDP (Liberty Democratic Party) regained power.
• Shinzo Abe became Prime Minister for the longest tenure in Japanese history.
• Abenomics comprises three components: aggressive monetary policy, flexible fiscal policy, and a growth strategy.
• Aggressive monetary policy aims for a 2% inflation rate and increasing government bond purchases.
• Flexible fiscal policy focuses on infrastructure spending.
• The growth strategy prioritizes structural reforms and opening up closed markets.
• This strategy is often referred to as the "three-arrow strategy".

Why Abenomics?

• Exports are declining.
• Household consumption and investment are decreasing.
• Real wages are decreasing.
• The debt-to-GDP ratio is increasing.

Macroeconomic Performance

• A table showing data for inflation rate, unemployment rate, GDP growth rate, and Stock price index (Nikkei average) by period from 1998 - 2020.
• A chart showing the growth of Japanese private consumption, credit to the private sector, real GDP and real wages over time.
• Another chart showing Japan's Government Debt: % of nominal GDP from 1994 to 2022, showing a considerable increase.

Monetary Policy

• The target is 2% inflation, aiming to end deflation which had lasted for 15 years.
• Quantitative and qualitative easing (QQE) was introduced in 2013 by the BOJ (Bank of Japan) governor, Kuroda.
• A negative interest rate was introduced in 2016 by the BOJ.
• A chart showing changes in inflation rates over time.

Result

• Abenomics succeeded in ending deflation.
• Abenomics did not achieve the 2% inflation target.

Monetary Policy - Failure?

• Monetary policy did increase aggregate demand, and improved the output gap but prices were unmoved in Japan largely due to its deflationary mindset.

Flexible Fiscal Policy

• The Consumption tax rate was raised from 5% to 8% in 2014. The plan has been postponed twice, but in 2019, it increased to 10%.
• The Abe government focused on infrastructure spending.
• A chart shows the change in tax revenues (general account) over several years.

Evaluation

• Some economists say the consumption tax increase delayed the economic recovery and hindered reaching the 2% inflation goal.
• Others say it was necessary for future debt sustainability.

General Government Debt

• A chart displays the general government debt as a percentage of GDP across various nations from 1995-2021.

Growth Strategy

• The main goal is to increase the trend of potential growth while mitigating the impact of demographic decline and fiscal consolidation.
• A key aspect is activating investment, maximizing potential, expanding new markets, and integrating into the global economy.
• The strategy heavily relies on structural reforms and opening the closed markets.

Growth Strategy (Further Detail)

• Reviving economic earning power - lowering corporate income taxes, restarting business-labor talks on wage increases.
• Increasing the workforce - boosting tax exemptions for couples, improving after-school childcare facilities.
• Reforming regulations - limiting the power of the Japanese agricultural organization ("JA").

Nikkei Index

• A chart illustrating the movement of the Nikkei Index, highlighting periods around Prime Minister Abe's tenure.

Post Bubble Period - Lost Decades

• This refers to the two decades after a significant asset bubble (1990s) and includes multiple events, like financial crises.

• The period includes the asset bubble, the burst of the bubble, the banking crisis, Koizumi period, and the political chaos period.

• The main problems included, the bursting of the asset bubble, the banking crisis that followed it, the Koizumi era and political chaos.

The Asset Bubble

• Factors causing the asset bubble include bank deregulation and easy money policies (like the Plaza Accord and Louvre Accord) that initially increased US dollar depreciation but in turn triggered increased Japanese imports.

• The yen appreciated significantly from ¥237 to ¥154 from 1985 to 1986.

• Expansionary monetary policies were followed to address Japan's declining economy but contributed to a bubble.

The Cause of the Bubble

• Bank deregulation, where tight regulations by the Ministry of Finance were removed, allowed banks to seek higher profits by taking on riskier customers which caused later difficulties.
• Easy money in the late 1980s played a factor in causing the asset bubble via policies like the Plaza Accord and Louvre Accord.

The Plaza Accord of 1985

• An agreement among leading world governments (the G5) to coordinate monetary policies to depreciate the US dollar against other currencies, such as the Japanese Yen.
• The motivations behind the Accord were to address the sharp increase in the USD and the resulting increased Japanese imports into the US.

Yen Appreciation

• The Yen increased in value from ¥237 (per dollar) to ¥154 (per dollar) between 1985 and 1986.

Expansionary Monetary Policy

• Central banks use expansionary monetary policy to stimulate a declining economy.
• In Japan, the BOJ lowered short term-interest rates and increased the money supply.

Louvre Accord of 1987

• An agreement among leading world governments (the G7) to stabilize major currencies halting the depreciation of the USD against other currencies.
• This policy created a contradiction in goals for Japanese monetary policy that sought to depreciate the yen to maintain competitiveness but was restrained by the Accord.

World Situation

• Black Monday crash of 1987 saw a substantial drop in the Dow Jones Industrial Average..

Observed Phenomena

• Several amusement parks and resort hotels were built but most were unsuccessful and many were forced to either close down or adapt to new ownership.
• Increased inequality as property owners became very wealthy.
• Over-building of office towers which remained largely empty.

The Burst of the Bubble

• The Governor of the BOJ (Bank of Japan) Mieno Yashishi abruptly ended the expansionary monetary policy by raising interest rates tightening money supply.

Lost Two Decades

• The major feature is low growth rate and negative inflation.
• The period includes the Bubble Burst, the Banking Crisis of 1997-1998, the Koizumi Period (2003-2007), and the Political Chaos Period (2007-2012).

Banking Crisis (1997-1998)

• Non-performing loans had accumulated during the bubble period, impacting Japan's banks.
• Banks struggled to meet BIS (Bank for International Settlements) capital adequacy requirements.
• The government responded with fiscal measures including providing public money and restructuring banks.
• A vicious circle formed where attempts to improve BIS ratios increased credit crunch leading to more bankruptcies and worsening bank asset quality.

Koizumi Period (2003-2007)

• The Koizumi government heavily focused on economic reforms. This included streamlining public works.
• It also involved adjustments to medical fees and the privatization of the postal system.

Political Chaos Period (2007-2012)

• The 2008 Lehman Shock in the US negatively impacted Japan causing a recession.
• The demand from the US declined sharply, and the yen appreciated significantly.
• Political instability impacted the economy.

Monetary Policy (Further Details)

• Increasing the money supply involved buying untraditional assets through open market operations (like foreign, bank and corporate bonds, and mortgage bonds).
• Inflation targeting was used to help change expectations about future inflation.
• Yen depreciation improved Japan's competitiveness and stimulated domestic and foreign demands.

Liquidity Trap

• A situation where expansion of the money supply doesn't translate to increased aggregate demand.

Fiscal Policy

• Fiscal policy in Japan post 1990 had a progressively expansionary tone in response to weakening economic conditions.
• Japan had the highest government debt to GDP ratio (192%) compared to other major industrial countries in 2016.
• Critics argue that huge fiscal spending failed to revive the Japanese economy. (A graph visually represents Japan's government debt level over time relative to other major countries.)

Why It Remained Long

• cyclical adjustments for overcapacity,
• bad debts accumulated by banks,
• outdated economy with policies of lifetime employment, seniority pay,
• rapidly aging population,
• the emergence of China and the subsequent decrease in Japanese manufacturing competitiveness. (Various graphs and charts provide visual support for this period's data.)