Introduction to the Japanese Economy PDF

Introduction to the Japanese Economy I Chun Chen Chapter 6 Abenomics In 2012, the Liberty Democratic Party(自民党、LDP) defeated the Democratic Party of Japan (民主党、DPJ) and took back ruling power. At the same year, Sh...

Introduction to the Japanese Economy I Chun Chen Chapter 6 Abenomics In 2012, the Liberty Democratic Party(自民党、LDP) defeated the Democratic Party of Japan (民主党、DPJ) and took back ruling power. At the same year, Shinzo Abe, was appointed as Prime Minister by the Diet. He served the longest tenure as prime minister in the Japanese history of the parliamentary cabinet system. Abenomics Abenomics consists of three components, Øaggressive monetary policy, − an inflation target of 2% and quantity easing through the purchase of large amounts of government bonds. Øflexible fiscal policy − mainly of public spending on buildings and maintaining infrastructure such as roads and bridges. Øa growth strategy, − Increase the trend of potential growth, mainly the implementation of structural reforms and the opening of the closed markets. Thus often called the “three-arrow strategy.” Why Abeonomics? 1. Exports is shrinking 2. Household Consumption and Investment is decreasing 3. The real wage is decreasing. 4. Debt to GDP ratio is increasing. Monetary Policy Target: an inflation target of 2%. Aiming at lifting the economy from the deflation that had persisted in the preceding 15 years. Governor of BOJ, Kuroda, introduced quantitative and qualitative easing(QQE) in 2013. In 2016, the BOJ furthered introduced a negative interest rate. Data source: https://www.macrotrends.net/countries/JPN/japan/inflation-rate-cpi Result It was successful in lifting the economy out of the deflation. But it did not achieve the goal of 2% inflation. Monetary Policy Is it a failure of Monetary policy? Monetary policy indeed stimulated aggregate demand, leading to an improvement in the output gap. However, the prices hardly reacted due to the Japanese deflationary mindset( Watanabe and Watanabe, 2018) Flexible Fiscal Policy Fiscal Consolidation- The Consumption tax rate was raised from 5% to 8% in April 2014. But Prime Minister Abe has twice decided to postpone the agreed increase from 8% to 10%. In October 2019, the consumption tax rate increased to 10%. Fiscal Stimulus-the Abe government increased infrastructure spending. Source: Asian Economic Policy Review, Volume: 16, Issue: 2, Pages: 190-219, First published: 18 July 2021, DOI: (10.1111/aepr.12353) Evaluation Some economist blamed the two consumption tax increase as being the source of a delayed economic recovery and a failure to achieve 2% inflation. (the consumption was sluggish) Defenders of the tax hikes argue that it was necessary for medium to long run debt sustainability. Growth Strategy The important objective of Abenomics is to increase the trend of potential growth and partly to mitigate the impact of demographic decline and recessive impact of fiscal consolidation. Create an economic and business environment where active investment is undertaken; people can realize their potential to the fullest; new market are created; and firms and people are integrated into the world. The policy measures designed to achieve these objectives are mainly the implementation of structure reforms and the opening of the closed markets. Growth strategy 1. Reviving the Economy’s Earning Power Eg. gradually lowering the corporate income tax ; Reconvening a business- labor conference on wage increases and growth 2. Increasing the Workforce Increase tax exemption for spouses, increase availability of after-school student daycare…. female labor force participation rate is increasing. 3. Reform of “Bedrock” Regulations Reduce the power of the JA: TPP Nikkei Index Abe Macroeconomic Performance Inflation Unemployment GDP Growth Stock price index rate rate rate (Nikkei, average) 1998-2001 -0.3 4.6 1.4 16,134 2001-2006 -0.5 4.9 1.5 11,599 2006-2009 0.2 4.2 -0.7 13,433 2009-2012 -0.9 4.7 2.2 9571 2012-2020 0.4 3.1 1.2 18,680 Impact of Abenomics 2001-2007 2008-2012 2013-2017 Average annual growth(percent) GDP 1.3 -0.2 1.2 Private consumption 1.2 0.5 0.5 Private investment 1.8 -1.8 3 Exports 7.3 1.0 3.9 Core inflation -0.5 -0.4 0.5 Memorandum Population growth 0.1 0 -0.2 Unemployment rate 4.6 4.5 3.5 Public debt 171 217 240 World GDP growth 3.1 1.8 2.7 Source: Lechevalier, SÉbastien and Brieuc Monfort, 2018, “Abenomics: has it worked? Will it ultimately fail?”, Japan Forum, 30(2), 272-302. Challenges Wage Growth Low Labor productivity Government debt Aging society -low birthrate Some Macroeconomic Data Pre-Abenomics Period Abenomics Period (1997-2012) (2013-2017) Average Nominal GDP -0.5% 2.1% Growth rate Average Real Output 0.6% 1.1% Growth rate Inflation(GDP Deflator) -1.1% 0.9%  Introduction to the Japanese Economy I Chun Chen Chapter 5 Post Bubble Periods– the Lost Decades The occurrence of the asset bubble The lost two decades – Bubble burst(1992-1997) – Banking crisis (1997-2003) – Koizumi(2003-2007) – Political chaos(2007-2012) The occurrence of the asset bubble The cause of asset bubble 1. Bank Deregulation: Ø Previously, Japanese banks were tightly regulated by the Ministry of Finance. Ø In the early 1980s, the regulation was removed. And banks lost the protection and profits and rushed to find new and more risky customers. Thus, when the bubble ended, the loans became bad debts. The cause of asset bubble 2. Monetary explanation of the bubble: easy money in the late 1980s caused the asset bubble. – Plaza Accord and Louvre Accord – Expansionary monetary policy The Plaza Accord in 1985 Arrangement among representatives of the monetary authorities of the US, Japan, the UK, West Germany and France(G-5). Purpose: to coordinate their monetary policy so as to affect a depreciation of the US dollar relative to other currencies. Motivation: sharp and persistent real appreciation of the dollar during the early 1980s that had invited a flood of Japanese imports into the US. Yen Appreciation The yen appreciated from￥237 per dollar in 1985 to ￥154 per dollar in 1986. Expansionary monetary policy Central banks use to stimulate a declining economy. The BOJ lowered short-term interest rates and increase the money supply in response to the sharp yen appreciation. Louvre Accord in 1987 Agreement among G7 countries Purpose: stabilize exchange rate among major currencies ( halt the depreciation of the US dollars) Contradiction between international policy coordination(yen depreciation) and domestic policy(interest rate increasing) World Situation Black Monday crash: Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed. The Dow Jones Industrial Average (DJIA) fell exactly 508 points to 1,738.74 (22.61%). Observed Phenomena A large number of amusement parks and resort hotels were developed. The only hugely successful amusement park in Japan remains Tokyo Disneyland. – All others got into financial trouble and many of them are now closed. Some of them are operating under financial distress with a new management: for example, Huis ten Bosch (Dutch theme park in Nagasaki), Phoenix Seagaia Resort (seaside complex in Miyazaki), and Alpha Resort Tomamu (winter sports resort in Hokkaido). Phoenix Seagaia Resort (seaside complex in Miyazaki) Observed Phenomena Those who owned land became very rich and those who didn’t had little chance of buying their home. This increased the sense of inequality and social injustice. Enriched people purchased luxury goods and consumed expensive dresses and food. They traveled all over the world to spend money. Too many office towers were built in urban areas. They stood empty for many years to follow. Tokyo area, average The burst of bubble Mieno Yashishi, who was appointed governor of the BOJ in December 1989, had abruptly halted the expansionary monetary policy. – Tighten money and raise interest rates Lost two decades The lost two decades The central feature of the Lost Two Decades is very low growth rate and negative inflation rate. Bubble burst period Time: 1992-1997 The negative wealth effect caused by the stock and land price declines affected the consumption and investment. In 1992, the government introduced an economic stimulus packages. – Pour money into stock market. – Expansionary policy Bubble burst period cont. In 1996, the economic growth increased to 3.5% which was highest among the G7 countries. In 1997, the consumption tax was raised from 3% to 5%.( to restore the fiscal soundness) The Banking Crisis period Time: 1997-2003 Started from the increase in consumption tax in 1997 Then Banking crisis in Japan Then Asian financial crisis Banking Crisis in 1997-1998 After the bubble collapsed, the recession and corporate bankruptcies increased bad debt, and the decline of land and stock prices additionally hurt the balance sheets of banks. Banking Crisis in 1997-1998 The non-performing loans accumulated during the bubble period, many Japanese banks faced difficulty to meet the BIS*(Bank for International settlement) capital adequacy requirement. *: an international financial institution that serves central banks in their pursuit of monetary and financial stability Banking Crisis in 1997-1998 Vicious Circle →Improving BIS ratios by reducing risky assets →Then it leaded to credit crunch. →Thus, it caused more bankruptcies and worsened the quality of bank assets. BIS ratios: Bank capital/ Bank riscky assets In response to the banking crisis (1997-98) The government – Prepare public money(12% of GDP) to deal with the bad debt problem. – Manage the closure and merger of weak banks – The BOJ adopted zero interest rate policy Discount rate: 6% in 1990 Discount rate: 1.75% in 1993 Discount rate: 0.1% in 2001 Koizumi period Time: 2003-2007 Pressure the banks to reduce the non-performing loans(NPLs) Pushed the economics reforms – Streamlining public works – Adjustment of medical fee structure – Privatization of postal system Political chaos period Time: 2007-2012 In 2009, because of the Lehman’s shock in 2008, the spillover to Japan had Japanese economy fell into recession. – The demand from the U.S. decreased sharply. – The yen appreciated sharply. Political chaos Monetary policy Increase the money supply: buy untraditional assets in open market operation including foreign bonds, bank and corporate bonds, mortgage bonds… Inflation targeting: change people’s expectations about future inflation. Yen depreciation: improve Japan’s competitiveness and stimulate domestic and foreign demand. Liquidity trap 流動性の罠 A situation in which expansion of money supply simply enlarges the money holdings of the nations citizens, and does not therefore stimulate aggregate demand. Fiscal Policy Because of worsening economic situation, the fiscal policy has been expansionary since the 1990s. The Government debt stood 192% of GDP, the highest among major industrial countries in 2016. The opponents said that the government failed to recover Japanese Economy by huge fiscal spending. Fiscal Policy Why it remains so long 1. Cyclical: stock adjustment for the overcapacity of capital and inventory created in the bubble period. 2. Bad debts: banks failed to get rid of bad debts 3. Obsolete economic system: lifetime employment, seniority wages, and so on. 4. Social change: rapidly aging population 5. The emergence of China and the hollowing-out of Japanese manufacturing