Abenomics

[Josquius]

The self-induced paralysis is over. After 20 years of mostly subpar growth, Japan has finally decided to try the three magic words of central banking: whatever it takes.

Of course, it's not just about the words. Those can be, well, cheap. It's about the policy behind the words too. That shows how much the words are worth. By that standard, the Bank of Japan's (BOJ) latest words were worth quite a bit. Indeed, it announced what it called a "massive" bond-buying plan to double the monetary base over the next two years.

To translate from central-banker-speak: The BOJ is going to print $1.43 trillion worth of yen.

That's a lot of yen. And it might end up being even more. The BOJ also said it will keep buying bonds, potentially above the $1.43 trillion worth it's already promised, "as long as it is necessary" for hitting and maintaining its new 2 percent inflation target. In other words, the BOJ will print money, and won't stop, until it does what it has set out to do. It's what a certain Princeton professor would call "Rooseveltian resolve".

A Princeton professor by the name of Ben Bernanke. Back in 1998, before he joined the Fed, Bernanke tried to figure out what had gone wrong in post-bubble Japan. It's a question few could have anticipated just a decade earlier, when Japan seemed poised to surpass the U.S. as the world's premier economic power. But then its epic housing and stock market bubbles collapsed. Corporate real estate fell as much as 80 percent. The Nikkei fell from a high of nearly 39,000 to its current 12,600. Japan only avoided a full-on depression thanks to large-scale deficit-spending, but it didn't avoid a lost decade. You can see this quiet disaster in the chart below from Brad DeLong. It look at Japanese GDP per capita as a percent of U.S. GDP per capita. After decades of rapid catch-up growth that nearly caught it all the way up, Japan actually lost ground in the 1990s, and just stabilized thereafter.

JapanConvergence.png

In other words, Japan is rich, but the reason it's not richer, in Bernanke's opinion, is that the BOJ passively allowed a catastrophe to happen.

After the bubble burst, the BOJ turned to its normal playbook. It cut short-term interest rates to try to get households and businesses borrowing again. But with so many of them underwater on their loans, nobody wanted to borrow. Even when interest rates fell to zero. The weak economy meant inflation was weak too -- so weak that it turned negative, to deflation. And that's when things got really bad. Now, falling prices certainly sound like a good thing -- who doesn't like paying less? -- but they're poison for an economy. Falling prices eventually mean falling wages, and falling wages make debts that aren't falling harder to pay back. But even for people who could still afford to buy things, why do so today if they'll be cheaper tomorrow? In other words, deflation increases the burden of debt, and increases the incentive to hoard money. That's what we call a depression.

But what could the BOJ do? Its main tool was cutting short-term interest rates, but it couldn't cut them below zero. Well, as Bernanke (and Paul Krugman and Michael Woodford, among others) argued, it could always print money now or promise not to raise rates later. Or both! But the magic of the printing press means a central bank can always create inflation, as long as it wants it. The BOJ just had to want it.

And now it does. The new prime minister, Shinzo Abe, ran on a platform last November of ending deflation now. (Yes, Japan still has deflation, even after all this time). He pledged to not only give the BOJ a 2 percent inflation target -- compared to the 1 percent target it had, and wasn't hitting -- but also to make the BOJ hit it. The Nikkei promptly melted up, and the yen sold off. But between then and now, there have been plenty of questions about how committed Abe and Kuroda would be to so-called "Abenomics" -- aka, printing money, and lots of it. Would they lose their nerve, and fall back on the kind of limited bond-buying the BOJ had tried between 2001 and 2006? Back then, the central bank did print money (and, perhaps not-so-coincidentally, this was the only time in the past 20 years that Japan grew well), but it only printed pre-determined amounts. It wasn't open-ended.

But now, 14 years later, the BOJ finally seems to be taking Bernanke's advice. (You might say the BOJ listens to Bernanke with long and variable lags). Kuroda's announcement today made it clear: Abenomics is ready for takeoff. And so are Japanese markets. As Scott Sumner points out, the Nikkei jumped 4 percent after the BOJ announcement on Thursday -- clearly the market agrees with the academics that central banks can have a big impact even when interest rates are zero. Whether that turns to be true or not is the biggest economic story in the world right now.

For the sake of a world economy that has been turning Japanese the past five years, let's hope it is.

http://www.theatlantic.com/business/archive/2013/04/abenomics-takes-off-can-japan-un-doom-itself/274650/



I'm not sure what to make of all this, don't understand enough about banking to make a judgement.
So...anyone read anything about the changes in Japan?
Just another guy who will be PM for a few months, talk big and accomplish nothing? Or could this finally be Japan pulling itself back together again? A good time to learn Japanese?

[MadImmortalMan]

I'd say it's cautiously optimistic as long as they time the stopping part correctly. Since everybody is doing QE right now, the impact to exports won't be what they could otherwise expect, but getting the domestic lending going should be very helpful. I don't think the Japanese have a borrowing culture. It's a hurdle. Plus, they've got like a quadrillion yen locked up in bonds already.

[jimmy olsen]

Sounds good to me, but I'm not an economist either. 

[citizen k]

When newly elected Japanese Prime Minister Shinzo Abe promised new deficit spending and pedal-to-the-metal monetary inflation, the progressive Keynesians were excited. And indeed, debasing the yen seemed to work for a few months, with analysts saying US policymakers should follow Japan's lead. Yet now Japan's recovery seems to be collapsing, leading its Cabinet to approve yet another "stimulus" package. Does anyone else have a sense of deja vu?

Abe has been Prime Minister of Japan since December 2012. You can see what has happened to the Yen/USD exchange rate under his brief tenure:

During Abe's first year in office, the yen has fallen about 20 percent against the US dollar. Yet Abenomics was hailed as a good thing by several progressive Keynesians early on. For example, in May 2013 Paul Krugman held up "Japan the Model," writing:

    [T]he ongoing economic experiment...is so important, not just for Japan, but for the world.

    In a sense, the really remarkable thing about "Abenomics" — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism.

    ...So, how is Abenomics working? The safe answer is that it's too soon to tell. But the early signs are good...

    The good news starts with surprisingly rapid Japanese economic growth in the first quarter of this year — actually, substantially faster growth than that in the United States, while Europe's economy continued to shrink. You never want to make too much of one quarter's numbers, but that's the kind of thing we want to see.   

    Meanwhile, Japanese stocks have soared, while the yen has fallen. And, in case you're wondering, a weak yen is very good news for Japan because it makes the country's export industries more competitive. 

    ...So the overall verdict on Japan's effort to turn its economy around is so far, so good. And let's hope that this verdict both stands and strengthens over time. For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy.

Other progressive Keynesians made similar pronouncements with even more confidence. For example, Matt Yglesias wrote in May: "Japan's economic reform...has important lessons for us. Japan fell into the trap of prolonged high unemployment and zero interest rates long before the United States did. It's in many ways fitting that they now seem to be leading the path forward to recovery."

For a third example, in August Dean Baker wrote:

    Fortunately for the Japanese people, the folks currently running their economy are more interested in sound economic policy than pushing scare stories about debt and deficits. Rather than rushing to reduce the deficit, Japan's new prime minister, Shinzo Abe, went in the opposite direction. He deliberately increased spending to create jobs.   

    ...While we are still in the early days of Abe's program (he just took office at the end of 2012), the preliminary signs are positive. The economy grew at a 2.4% annual rate in the second quarter, after growing at a 3.6% rate in the first quarter. By comparison, GDP in the United States grew at an average rate of just 1.4% in these two quarters.
   
    ...At this point, America's deficit hawks are jumping up and down screaming that the boost to Japan's economy is just a "sugar high", and that it will soon face a horrible collapse as payback. Of course, anything can happen in the future, but we just don't see any real evidence of the deficit hawks' doom story as of yet.     

    ...In short, it is hard to tell a story about how Japan will suffer as a result of the measures its government is taking to boost growth and create jobs. These policies are 180 degrees at odds with the deficit fixation that dominates Washington policy debates.

In the quotation above, I show how Baker is explicitly contrasting Abenomics with the "deficit hawks" running US policy. I can point to plenty of examples of Krugman and Yglesias warning that budget "sequestration" in the US would hurt the tepid recovery. This is of course a natural implication of their Keynesian worldview: The US economy should have slowed, perhaps even slid back into recession, during 2013, because of idiotic budget cuts. In contrast, the deficits and monetary inflation in Japan should have bolstered their growth.

Well, as Dean Baker says, anything is possible in the future. But the current numbers say that Japan's robust real GDP growth has fallen sharply to 1.1 percent by the third quarter, and despite the weaker yen Japan's November trade deficit was the largest on record, with a string of consecutive monthly trade deficits not seen in decades.

In contrast, the latest estimate for US real GDP growth in the third quarter was a very robust 4.1 percent.

Now I haven't seen our Keynesian pundits address Japan recently, but I think I know their position without even looking: The US economy would have grown even faster still had the Congress not foolishly cut spending or engaged in the pointless and destructive government shutdown. Furthermore, Abenomics really is working out great, just like they said, only Abe hasn't run deficits quite big enough, or debased the yen quite enough. But trust them, they have science on their side.

[The Minsky Moment]

K- who wrote the article?

I would quibble with it.

First, support for Abenomics is neither limited to nor even primarily associated with "progressive Keynesians" [?]  In fact, at its core it is orthodox monetarism - it follows Milton Friedman's proposal almost to the letter and has been praised by many in the monetarist camp.  Assuming "progressive" is intended by the writer to be more than a negative mood affiliation label but rather to denote left-leaning or "paleo" Keynsians from more "mainstream" or "non-progressive" New Keynsians, it also misses the mark - the Abe/Kuroda program is clearly influenced by Michael Woodford's ideas about forward guidance and policy signalling, and not to mention Bernanke (per Tyr's link).  Either the author is just grinding an axe against "PKs" or he is trying to conceal the fact that the Abe/Kuroda program generally enjoys quite broad support among professional and academic macro-economists and reflects mainstream monetary thinking.

Second, the Abe program is not a deficit fueled fiscal program; he is increasing the sales tax.  It is true that Abe did not go in the other direction, with an immediate austerity plan (and for good reason).

Third, the current account (trade deficit) is not really of great concern; the point is to restore GDP growth and reflate the ecomomy.  The November jump occurred because of the sales tax plan - domestic consumers rushed to buy goods before the tax goes into place. 

Fourth, the GDP figures are in fact quite favorable to Abe.  The two quarters prior to Abe's election, real GDP *fell* by over 3% annualized each quarter.  The quarter overlapping with his election came in at 0.6%.  Since his program was put into place, the figures are 4.5, 3.6. and 1.1.  That looks pretty good to me.  Even the "weak" 1.1 is safely above the three prior quarters before Abenomics.  How about reflation?  Well the GDP deflator has returned to zero from a deflationary position, and the CPI recently reached a five year high at 1.2%.

[DGuller]

K- who wrote the article?

That's the first question I had a few paragraphs in.  It doesn't sound as deranged as the usual diatribe from the right, but it's still a pretty obvious hatchet job.

[garbon]

http://mises.ca/posts/blog/but-the-progressives-told-us-abenomics-would-be-great-for-japan/

[Jacob]

K- who wrote the article?

That's the first question I had a few paragraphs in.  It doesn't sound as deranged as the usual diatribe from the right, but it's still a pretty obvious hatchet job.

Matthew O'Brien, apparently.

[DGuller]

http://mises.ca/posts/blog/but-the-progressives-told-us-abenomics-would-be-great-for-japan/

I guess I really stepped in it when I said it wasn't that deranged.

[The Minsky Moment]

http://mises.ca/posts/blog/but-the-progressives-told-us-abenomics-would-be-great-for-japan/

So he is an Austrian.  That would explain his position.  He is entitled to his view - economics is far from an exact science and Austrian theory has a long pedigree even if it is considered outside the mainstream in the present day.  But I do think it is very misleading to suggest the other side is populated solely by Krugmanite "progressives" (egad!)  The pro-Abenomics camp is considerably broader.