Satyajit Das: In Japan, Neither the 2020 Olympics Nor Abenomics Will Be Magic Bullet
Tokyo's winning bid for the Olympics and Shinzo Abe's new economic policies have given the Japanese new hope. Outsiders still have doubts.
Under second time Prime Minister Shinzo Abe, Japan has initiated an ambitious "three arrows" economic recovery plan, christened "Abenomics."
The first arrow represents a yen 10.3 trillion (US$100 billion) fiscal stimulus program increasing public spending. The second arrow represents a further easing of monetary policy to increase demand, investment, and inflation to 2%. The third arrow represents structural reforms to increase incomes and improve Japan’s industrial competitiveness and productivity. Japan’s total factor productivity in the manufacturing, non-manufacturing, and agricultural sectors is the same as in 1991.
The program is designed to increase growth, income, spending, and inflation, and to reduce the value of the yen to increase Japan’s exports. The hope is that it creates a self-sustaining virtuous cycle of rising prices, rising wages, and increasing economic activity.
The policies have all been tried before, with limited success.
The government’s current spending program follows 15 stimulus packages that were enacted between 1990 and 2008. Based on previous experience, new spending may provide a short-lived boost to economic activity but will not create a sustainable recovery in demand. The same applies to Olympics-related spending.
Investment will be mainly in non-tradable, non-competitive sectors like public infrastructure and construction, which frequently create overcapacity and earn poor returns. The OECD recently identified the inefficient and ultimately wasted investment that characterized previous packages.
Japan has maintained a zero interest rate policy (ZIRP) for over 15 years and implemented several rounds of QE. The new plan will assist the Japanese government to finance its spending. It may also help devalue the yen and boost asset prices. But given that short term rates were near zero and 10-year rates around 0.50% before the announcement of the plan, the effect of monetary initiatives on real economic activity are likely to be less significant
Structural reform requires de-regulation of inefficient sectors of economy, opening them up to domestic and foreign competition. Reform is needed in the areas of taxation, trade policy, labor markets, environmental laws, energy policy, and health care, population and immigration services.
Many "reforms" are vague statements of objectives. Many of the ideas are old. Many policies have been tried before, unsuccessfully. The required changes are also politically and culturally difficult.
Reform of agriculture would require reducing or eliminating large agricultural subsidies as well as anti-import restrictions on rice and dairy products. It would require changes in land laws that limit the size of farm plots. But attempts at serious reform put the government in conflict with its own supporters and financiers, such as the farm lobby.
Initially, the Japanese stock market responded positively, rising around 70% since late 2012, with foreign buying a significant factor. The yen fell against the US dollar from around yen 80 to yen 100, a decline of around 25%. Japanese government bond (JGB) interest rates fell initially anticipating Bank of Japan buying.
But in May 2013, the Japanese financial market began experiencing increased volatility. The stock market fell sharply by over 20%, with daily price moves of 3-7% being experienced. JGB interest rates increased sharply, rising from around 0.50% to 0.90%. The yen also reversed its fall. Financial market volatility was sharply higher.
The reversals reflect closer scrutiny of the program’s inherent contradictions.
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