The Fiscal and Monetary Policy for Japan
from the ‘Abenomics’ point of view
Universiteit van Amsterdam Bachelor Thesis Economics and Finance
Supervisor: Dr. Hudab Al-Kobaisi Student: Stefanie de Waard 6117309 Specialization: Economics and Finance Field: Macro Economics
The Fiscal and Monetary Policy for Japan Page from the ‘Abenomics’ point of view
1. Introduction 2.
2. Research method 3.
3. ‘Abenomics’ 4.
4. Economic history of Japan 7.
1985-1990 7.
1990-1999 8.
1999-2012 8.
5. Literature on Quantitative Easing - Monetary Policy of Japan 10. 6. Literature on the Federal Reserve handling QEP 12. 7. Monetary Policy and Fiscal Policy according to the Mundell-Fleming 13.
model will stimulate private investment on the short run
8. Quantitative Easing will stimulate welfare 15.
9. ‘Abenomics’ will stimulate inflation on the short run 19. 10. ‘Abenomics’ will stimulate inflation on the long run 19.
I. How can ‘Abonemics’ achieve its goals? 19.
II. What will be the impact on Japan’s economy? 24.
III. How will the surrounding Asian countries suffer from Japan’s 24. monetary and fiscal policy?
11. Conclusion 25.
Reference list 27.
Appendix 1 Key terms and definitions 30.
Appendix 2 Key themes proposed by the Headquarters for Japan’s economic revitalization 31. Appendix 3 Main areas of focus for regulatory reform panel 32.
1. Introduction
Japan is number four in the world ranking by GDP of about $5867 US billion, the third largest automobile manufacturing country and it has a leading electronic goods industry. The increase in Japan’s share of international trade and financial transactions plays a major role in the world economy. Despite this, Japan has been facing deflation for 18 years now. Somehow over the years, several monetary and fiscal policies could not manage to get Japan out of deflation. When the ‘bubble’ economy of Japan collapsed in 1990, the Bank of Japan (BOJ) started, around 1995, to decrease the overnight call rate to 0.5 percent. In 1999 the BOJ lowered this call rate to even zero. When not even this lowered call rate managed Japan to overcome deflation, the BOJ started introducing the quantitative easing policy (QEP) in 2001. When the QEP turned out to be
unsuccessful it was lifted in 2006 and the BOJ went back to the zero interest call rate policy (ZIRP). When in 2007 the financial crisis broke out and started showing in Japan in 2008, it became even harder for Japan to face any prospects of overcoming deflation since export started to decrease. When the US started successfully using QEP to overcome the financial crisis, leading to recovery from the crisis, this somehow made Japan rethink the QEP. The QEP that is combined with an excessive fiscal policy, executed by the government of that country, brought the US economic recovery. Shinzo Abe, the new Prime Minister of Japan, introduced his
proposal to apply the QEP together with fiscal policy to get Japan out of deflation, to encourage private investment and economic growth. This policy is currently applied under the name
‘Abenomics’1. How the new policies will affect Japan is truly an important subject for all central banks as an example of overcoming long-term deflation. This paper will analyze, with the help of macro-economic models, the impact of ‘Abenomics’ on Japan’s economy and that of the surrounding Asian economies.
The main research question that will be answered in the conclusion of this thesis is; can ‘Abenomics’ achieve its goals without destabilizing the surrounding Asian economies? To answer this question we will first answer the following questions: How can ‘Abenomics’ achieve
1
In December 2012 the new Prime Minister Shinzo Abe from the Liberal Democratic Party (LDP) was elected with 294 seats in the Lower House of Japan, leaving the LDP with a majority of more than two-third in the Lower house, which enables his Administration to pass legislation even if rejected in the Upper House (Kawagushi, 2013). Thereby enabling Shinzo Abe to start with his ‘’Abenomics’. ‘Abenomics’ is a portmanteau of economics and Shinzo Abe. It refers to the economic policies advocated by Abe to overcome the deflation Japan is facing for a long time. It is meant to resolve macro-economic problems relating to Japan’s high savings rate, deflation, and flat economic growth.
its goals?; What will be the impact of ‘Abenomics’ on Japan’s economy? and; How will the surrounding Asian Countries suffer from Japan’s monetary-and fiscal policy?
For testing the research question, ‘can ‘Abenomics’ achieve its goals without destabilizing the surrounding Asian economies?’, four hypotheses will be tested. These hypotheses are:
1. Monetary policy and fiscal policy according to the Mundell-fleming model will stimulate private investment on the short run.
2. Quantitative easing will stimulate welfare.
3. ‘Abenomics’ will stimulate inflation in Japan on the short run. 4. ‘Abenomics’ will stimulate inflation in Japan on the long run.
Post expectations are that quantitative easing will have a slight effect on welfare for the surrounding Asian economies, however less on Japan’s economy. Fiscal and Monetary policy will have no effect on Japan’s trade position on the long run. The short run effect of ‘Abenomics’ will be a trade advantage, therefor resulting in increases on the net export. This will resolve in inflation and economic growth for the long-term prospects of Japan. This will benefit the surrounding Asian economies. If inflation at 2% would be the case on the short run this will have a negative effect for Japan since this would withhold economic growth.
After informing the research method, this paper will begin by explaining the current policy situation for Japan, ‘Abenomics’. This will be continued by shedding light on Japan’s banking system policy history in chapter 4, which will be continued with 2 tables of literature that are relevant to this paper. In chapter 7 until chapter 10 the hypothesis will be tested, in the same order as mentioned above. Chapter 10 contains the three sub questions where the policy of Japan is compared with that of the Federal Reserve (FED) and in chapter 11 the overall results of this paper will be set out in the conclusion.
2. Research method
With macro-economic models, such as the Mundell-Fleming (IS-LM-FE) and the Aggregate Supply and Demand model (DAD-SAS), an analysis will be made of the current situation and the impact of ‘Abenomics’ policy on Japan and the surrounding Asian economies. Analyzing the
period starting from Abe’s reelection in December 2012 until the finalization of this research (August 2013) and with the help of the Mundell-Fleming model and the aggregated supply and demand model, a prediction for future economic stadia in the short run and in the medium-term will be made on the basis of a comparison of the QEP of the Federal Reserve (FED). All data needed for the macroeconomic models are from the following databanks at
tradingeconomics.com, stat-search.boj.or.jp, bloomberg.com and data.worldbank.org.
3. ‘Abenomics’
Adam S. Posen is the President of the Peterson Institute of International Economics. He is
considered being one of the world’s foremost experts on macroeconomic policy, the resolution of financial crisis, the economies of Europe, Japan and the US, and Central Banking issues. He is a long-term scholar of Japanese economic policy. In September 1998 he published ‘restoring
Japan’s economic growth’ (1998) published by the Institute of the International Economics. It
puts the monetary and fiscal policy of Japan in perspective from 1990 until 1998. In chapter 5 (1998, p. 113) of his book, Adam Posen presents his recommendation for how to get Japan at economic recovery. He mentions that in 1995 when Fiscal policy was applied for the first time, it was successful in raising the growth rate. Therefore he advises that the policy for the Japanese
‘macroeconomic policy should begin with the passage of a true fiscal-stimulus package. This package should be of a sufficient size to raise growth above the Japanese potential growth rate of 2 to 2.5 percent, that is, 20 trillion yen, or 4 percent of GDP based on current date.’ (A. Posen, 1998, p.113). He continues that, contrary to the fiscal policy set in 1998 by the
government under Hashimoto, it should include a permanent income tax cut. This should be accompanied by a ‘monetary policy that is committed to reserving deflation and minimizing
uncertainty about the future price level, a goal best served by the announcement of a small positive inflation target of 3 percent and not by the conscious depreciation of the yen. The idea is to encourage stabilization and long run planning, not simply to inflate in an anchored manner. Clean up of the Japanese financial system is needed to make the recovery sustainable. The restoration of incentives for Japanese savers to keep their money in identifiably solvent private sector banks should be the fundamental goal of financial reform. This requires steps to close banks, shore up the credibility of deposit insurance, and encourage the shift of savings from the public to the private sector’ (A. Posen, 1998, p.114).
I am referring to Adam Posen because his ideas in this book about what Japan should do, are kind of similar to the current ‘Abenomics’ that Abe is applying in Japan.
Abe has demanded2 that the BOJ pursue a quantitative-easing strategy that will deliver an inflation rate of 2 to 3 percent. This target inflation and his fiscal policy will stimulate economic growth on the long run.
‘Abenomics’ contains a strong monetary policy, fiscal policy and economic growth stability to encourage private investment and economic growth. The monetary policy3 includes a massive increase in monetary stimulus through unconventional central banks’ policy, that is the
‘qualitative and quantitative’ easing policy. The fiscal policy4 supports a great increase in fiscal stimulus to encourage economic growth through increased government spending. The economic growth stability5 is the reform program aimed at making structural reform to the Japanese economy. These policies in detail include inflation targeting accepted by the BOJ at 2% annual rate, stimulating public investments, correction of the excessive yen appreciation, setting negative interest, qualitative and quantitative easing, revision of the Bank of Japan Act, and buying operations of construction bonds by Bank of Japan (BOJ, 2013). How these three policies cooperate to an economic growth pattern, for Japan, is shown by Nomura (2013) in figure 1. The fiscal policy will probably have effects on the medium run and the monetary policy will show direct changes on the short run.
2 He has appointed a new BOJ governor and two deputy governors who will be committed to this goal.Abe’s vision to restricting the independence of the BOJ in order to get Japan out of deflation has won respect from those who believe that the central banks need to sacrifice their autonomy and monetize government deficits in order to reflate their economies (Economist, 2013).
3 The monetary policy; the quantitative easing policy (QEP) has the inflation target at 2% and the main goal is to get Japan out of a 25 year period of deflation. The QEP includes buying long yield bonds, which will eventually weaken the yen by increased money supply and lower the long-term interest rates, thereby stimulating higher share prices and will increase private consumption and corporate profits. The weaker yen will stimulate the export, thereby stimulation economic growth and inflation. QEP also includes the open-ended asset purchasing which will increase the expected inflation, which will stimulate Japanese people to spend, and thereby also resulting in economics growth and inflation.
4 Government expenditures will be released through increased government consumption, and increased public works investments.The fiscal policy is supposed to break the zero economic growth, and decrease the savings rate.
5The regulatory reform and the created economic partnership with other countries (TPP) will boost all drivers in the economic growth, which are wages, public investments, export, and private consumption.The structural reform key themes proposed by the headquarters for Japan’s economic revitalization for the growth strategy is shown in appendix 2 with appendix 3 specifying the regulatory reform.
Figure 1. ´Abenomics´ by Nomura. Source: Nomura (2013)
The interest rate on Japan's 10-year government bonds is now less than 1%. This is the lowest interest rate in the world. Despite this, Japan has a very high level of government debt and annual budget deficits. Japan's debt is around 230% of gross domestic product6 (GDP); this is higher than that of Greece (175% of GDP) and nearly twice that of Italy (125%). The annual budget deficit is nearly 10% of GDP, which is higher than any of the Eurozone countries. With nominal GDP stagnation, this deficit is causing the debt/GDP ratio to rise by 10% annually (stat-search, 2013). Abe already announced a 5.3 trillion yen in public works spending as part of the budget of 2013. This is a 10 billion yen increase from last years’ budget. This is a major debt prospect for the government of Japan.
For two decades Japan has seen GDP and long-term interest rates drop as deflation has become negative while debt has increased. A co-ordination of monetary and fiscal policy instead of either
6 Gross domestic product is the market value of the final goods and services produced within a selected geographic area (Japan) in a selected interval in time, that is 1 year in this case.
one policy, might be the solution for Abe to overcome Japan’s deflation in the long run. Since the economy of Japan is number four in the world ranking by GDP of about $5867 US billion the third largest automobile manufacturing country and it has a leading electronics goods industry, the increase in Japan’s share of international trade and financial transactions play a major role for the world economy (trading economics, 2013).
4. Economic history of Japan
After discussing the current fiscal- and monetary policy, ‘Abenomics’, it is important to shed light on earlier policies, to be able to understand where Japan stands today. Over the years Japan has faced different monetary- and fiscal policies, however not all with success. The following chapter will discuss the history of Japan’s banking system policies in three time periods 1985-1990, 1990-1999 and 1999-2012.
1985-1990
During the eighties, Japan was in a wave of future optimistic economic prospects. After world war two, Japan’s wealth was increasing to a level similar to that of the US (IMF, 2013). Japan had a balance of payment surplus that resulted in investing in the rest of the world. Most economists agree that the beginning of the bubble economy of Japan is September 1985, when Japan, France, West Germany, United States and the United Kingdom signed the Plaza
Agreement in New York. This agreement regarded the US dollar, Deutsche Mark and Japanese yen, and facilitated intervening in currency markets with the purpose to increase US exports by the depreciated value of the US dollar. During this period Japan was in a ‘bubble’ economy and the BOJ had lowered interest rates from 5 percent in 1985 to 2.5 percent by early 1987 (Trading Economics, 2013). This resulted in an increase of autonomous consumption and autonomous investments, which resulted in a high real GDP. The Japanese banks started mostly by lending to corporations, however after a while, the corporations began to build up cash surpluses and started excessing on the worldwide equity markets. Japanese Banks began lending to Japanese small firms and individuals, who invested in real estate. This increased the paper value of the land assets and since land was used as collateral that was forwarded to speculate at the stock market, banks continued granting loans based on overvalued land collateral. By December 1989, the benchmark Nikkei 225 stock average had reached a high of 38,915.87 yen and starting in 1990, the stock market began a downward spiral (indexes Nikkei). In December 1990 the bubble
economy had bursted. Since then Japan has still not recovered. 1990-1999
In 1990 when both the land and stock price bubbles had collapsed, the economy fell into stagnation. Declining asset prices generated an accelerated effect of this stagnation. During the summer of 1995 the BOJ reduced the overnight interest rate to below 0.5%, from highs of 8.6% in 1991 (Ueda, 2011). Even though the BOJ lowered the overnight interest rate, the economy experienced a severe credit crunch in 1997 to 1998. Early 1999 the overnight rate was lowered to essentially zero. In the second half of 1998 the inflation became negative. The inflation rate has not been positive for an extended period since then. Meaning that the economy has been
effectively in a ‘liquidity’ trap for about 18 years now. 1999-2012
The uncollateralized overnight call rate has been practically zero since the BOJs’ Policy Board made a decision on February 12, 1999 to lower the interest rate to be ‘’as low as possible’’ (Iwamura, 2005). From the year 1990 until 2000 the BOJ explored easing measures. In April 1999 the BOJ’s core monetary policy was the zero interest policy (ZIRP) (Ueda, 2011). This was the commitment to maintain the short-term zero interest rate ‘until deflationary concerns were dispelled’ (Ueda, 2011). However the BOJ decided to raise the overnight call market rate to 0.25% one year later, thereby lifting the ZIRP. Ueda (2011) states that this was based on the judgement that the economy was recovering and was showing several signs of overcoming deflation. When the IT bubble collapsed in 2001, the world economy came into a recession and this had an extra negative effect on Japan’s financial system and economy. In March 2001 the response of the BOJ to the burst of the IT bubble was the adoption of the quantitative easing policy. The quantitative easing consisted of three key elements. The first key element included that BOJ change its operating target. The operating target maintained an ample of the liquidity supply by using the current account balances (CABs) held by the financial institutions at the BOJ instead of the overnight call rate. The operating policy target included mainly the bank reserves. The Second key element for the BOJ was committing itself to maintain the provision of ample liquidity until the rate of the consumer price index (CPI) change became 0% or higher on a sustained basis. The BOJ committed to maintain the QEP until the core CPI stopped declining. The last element for the BOJ was boosting the amount of purchases of the Japanese Government Bonds (JGBs), including long-term JGBs and some other assets, as a tool for liquidity injection.
The BOJ clarified that the main goal of the purchases were an attempt to hit the target on the current account balances (CABs), and not to generate portfolio rebalances. Increasing the CABs’ target beyond the level of required reserves would normally keep the overnight call rate to near zero percent (Ueda, 2011). However since the commitment to maintain ample liquidity provision until deflation would end, the quantitative easing therefor maintained a version of the zero interest rate policy. Ueda (2011, p.4) states that ‘viewed on this way, QEJ7 can be regarded as consisting of ZIRP and liquidity provision beyond levels necessary for a zero rate relied partially on purchases of long-term government bonds.’ In 2004 the required reserves were 4
trillion yen (BOJ, 2013). The CABs on the other hand increased fast, because of the BOJs’ target; it increased with 1 trillion yen to 5 trillion yen in March 2001, to a range of 30-35 trillion yen in January 2004 (Ueda, 2011). These increases were achieved by market operations, which included the purchases of JGBs. It was in excess of the required reserves and it was believed to be necessary to keep the overnight interest rates at zero. During the duration of the QEP both the uncollateralized call rate and the 3-month treasury rate fell nearly to zero, bank loans steadily declined, and in the first couple of years the 10-year JGB yields fell (Bowman, 2011). The JGBs purchases started at 0.4 trillion yen per month in March 2001 and grew to 1.2 trillion yen per month by May 2004 (Ueda, 2011). In March 2006 quantitative easing was lifted and the BOJ returned back to the zero overnight call rate as its policy target. This was due to the Japanese financial system and the world financial and economic crisis during 2007-2009. In December 2008, the BOJ decided to increase purchases of the JGBs and to include inflation indexed bonds, floating rate bonds and 30-year bonds in the JGSs. After the Lehman Brothers shock, the market for inflation indexed JGBs to be dysfunctional and the purchases of commercial papers also came under pressure. In December 2009 the BOJ announced that the most preferred inflation rate was at the midpoint of 1%. In October 2010 the Comprehensive Monetary Easing (CME) was introduced, which included the decision to expand the purchases of CPs.
Most analysts agree that QEP was not very successful in achieving its goal of stimulating aggregate demand sufficiently to eliminate persistent deflation. In Japan the negative effect of the QEP was shown by a shallow recession in late 2001 and early 2002 after the policy was introduced. Japanese GDP growth rate was low and insufficient to pull inflation out of negative territory. Despite of the extremely low interest rates and the enormous level of excess reserves,
bank loans continued to decline through most of the QEP periods of Japan (Bowman, 2011, p.23).
The QEP failed to achieve its ultimate objective of eliminating deflation and most positive effects were overwhelmed by the drag on the aggregate spending that came from the severe weaknesses in the banking sector and balance sheet problems among households. The failure of the QEP was called the ‘lost decade’ since not even QEP could manage to boost output
substantially. The only positive effects were that QEP stimulated spending.
The question now is, what is the difference between the last and current QEP that will make the change and will help to get Japan out of deflation? This will be analysed and explained when the hypothesis are tested. First ‘Abenomics’ and the mandatory literature will be mentioned in the next two chapters.
5. Literature on Quantitative Easing- Monetary Policy in Japan
Author Year Research Result
Title: ‘Quantitative easing and Bank Lending; evidence from Japan’
Board of Governors of the Federal Reserve system
D. Bowman, F. Cai, S. Dally, S. Kamin
2011 ‘In the spirits of the Kashyap and Stein (2000) and Hosono (2006), this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of QEP, the Bank of Japan’s injections of liquidity into the interbank market.’ (p. 0)
‘1. The effect of the BOJ’s liquidity injections on bank lending was muted by the substitution of CB liquidity for interbank liquidity. 2. Despite the dampening of the stimulus from the liquidity injections due to substitution, we find a positive and significant effect of liquidity on bank lending. This suggests some scope for quantitative easing to affect the supply of credit, particularly during periods of financial distress. However the overall effect was measured to be quite small, so that eye-popping amounts of liquidity would have been needed to achieve noticeable effects. 3.we find some evidence that weak banks benefited more from QEP than stronger banks. Finally, our analysis suggest that the rapid unwinding of liquidity infusion observed at the conclusion of QEP had little impact on lending growth once bank health and confidence in the banking system had been restored.’ (p. 13) Title: ‘The relation between exchange rate and stock prices during the Quantitative easing policy in Japan’|
International Journal of Business, 11(4), 2006
Kurihara, Yutaka
2006 ‘This paper investigates the relationship between macroeconomic variables and stock prices by empirical examination.’ (Kurihara, 2006, p. 375)
‘Exchange rate is the main target variable and finds that interest rates have not impacted Japanese stock prices but exchange rates and U.S. stock prices have. Furthermore, the Bank of Japan’s policy for overcoming recession and deflation has been effective. Domestic interest rate does not influence Japanese stock prices and that the exchange rate influences Japanese stock prices. Investors may consider the characteristics of the enterprises such as their international trade behaviour and net foreign positions. U.S. stock prices have also influenced Japanese stock prices, suggesting an interdependent relationship between them. Finally, empirical results show that quantitative easing has influenced stock prices.’ (Kurihara, 2006, p. 384) Title: ‘Monetary policy under zero interest rate: viewpoint of the CB economists’
Monetary and economics studies/February 2001. 89-130
Fujiki, H., Okina, K., Shiratsuka, S.
2001 ‘this paper intends to examine monetary policy options under the environment of the zero interest rate. In so doing, we first describe the policy framework of the “zero interest rate policy,” which was in place from February 1999 to August 2000, and its transmission mechanism.
‘We argue that further monetary easing beyond the zero interest rate policy, most typified by the outright purchase of long-term government bonds, should be viewed as a bet which we would only be forced to explore in the event the Japanese economy stands on the brink of serious deflation. Considering the uncertainty and risks surrounding these unconventional measures, it is quite inappropriate to introduce them merely on an experimental basis. Of course, this does not mean that further monetary easing may not be warranted in any circumstances, nor that other easing measures not covered in this paper are infeasible. If other means of further easing turn out to be available, we should not spare any effort to study them.’… ‘We
Then, in view of the problems intrinsic to the zero interest rate, we address three important questions: (1) the policy options that might be available in response to future economic developments; (2) the major risks associated with these policy options; and (3) how such risks might change under varying economic conditions.’(Fujiki, 2001, p. 89)
can say that the search for desirable modalities for monetary policy is not necessarily tantamount to making a decision about inflation targeting. If the present policy framework adopted by the BOJ has an orientation toward attaining an optimal blend between a strictly rule-based approach and unconstrained discretion, the eventual modalities can be said to have some commonalities with inflation targeting. In other words, the proper sequence we should follow is to start from a particular modality for monetary policy, enhance its transparency and accountability, secure external credibility, and conduct monetary policy in a flexible manner. This process is self-reinforcing in the sense that it will bolster the credibility of monetary policy.’ (Feijki, 2001, p. 37)
Title: ‘The effects of quantitative easing policy: a survey of empirical analysis’
Monetary and economics studies, March 2007, 1-48.
Ugai, H. 2007 ‘This paper surveys the empirical analyses that examine the effects of the Bank of Japan’s (BOJ’s) quantitative easing policy (QEP), which was implemented from March 2001 through March 2006.’ (Ugai, 2007, p. 1)
‘The survey confirms a clear effect whereby the commitment to maintain the QEP fostered the expectations that the zero interest rate would continue into the future, thereby lowering the yield curve centering on the short- to medium-term range. There were also phases in which an increase in the current account balances held by financial institutions at the BOJ bolstered this expectation. While the results were mixed as to whether expansion of the monetary base and altering the composition of the BOJ’s balance sheet led to portfolio rebalancing, generally this effect, if any, was smaller than that stemming from the commitment. When viewing the QEP’s impact on Japan’s economy through various transmission channels, many of the analyses suggest that the QEP created an accommodative environment in terms of corporate financing. In particular, the QEP contained financial institutions’ funding costs from the market and staved off financial institutions’ funding uncertainties. The QEP’s effect on raising aggregate demand and prices was often limited, due largely to the then progressing corporate balance-sheet adjustment, as well as the zero bound constraint on interest rates.’ (Ugai, 2007, p. 1)
‘taking up studies that empirically analyze the QEP’s overall macroeconomic impact on Japan’s economy through various transmission channels, many of these analyses in general observe that the QEP created an accommodative monetary environment. Looking at the contents of the macroeconomic impact, while the transmission channels are not specified, these macroeconomic analyses verify that because of the QEP, the premiums on market funds raised by financial institutions carrying substantial NPLs shrank to the extent that they no longer reflected credit rating differentials. According to analyses of the economic situation during this period, if firms had heightened anxieties regarding their funding over fear of the stability of the financial system, further deterioration of economic and price developments resulting from the likes of deferring their business fixed investment might have occurred. Therefore, this observation implies that the QEP had the effects of maintaining financial market stability and an accommodative monetary environment by removing financial institutions’ funding uncertainties, and thereby preventing further deterioration of the economy reviewed above.’(Ugai, 2007, p. 35) Title: ‘What has- and has not been learned about monetary policy in a low inflation environment’
Paper presented at the Federal Reserve Bank of Boston 55th Economic Conference, October 14–16, Boston
Clarida, Richard
2010 ‘Do we have sufficient confidence in our alternative monetary policy tools to stabilize the economy at the zero lower bound?’(Clarida, 2010, p. 1)
‘1) how ‘credible’ it’s commitment is 2) how expectations are formed or 3) how term or default premia are determined. There are two fundamental questions. First, can these tools, aggressively deployed, eventually generate sufficient expectations of inflation so that they lower real interest rates? Forward-looking models generally predict that the answer is yes. However, the interplay between monetary policy and the yield curve can become complex when central banks are at the zero lower bound (Bhansali et. al. 2009) and central banks seek to provide a “deflation put”. Also, as discussed above, given the prominent role that inflation expectations play in inflation dynamics, inflation inertia is the enemy of reflation once deflation set in. A second question relates to the monetary transmission mechanism itself. In a neoclassical world that abstracts from financial frictions, a sufficiently low, potentially negative real interest rate can trigger a large enough inter - temporal shift in consumption and investment to close even large output gap. But in a world where financial
intermediation is essential, an impairment in intermediation – a credit crunch – can dilute or even negate the impact of real interest rates on aggregate demand. In the limiting case of a true liquidity trap, no level of the real interest rate is sufficient in and of itself to close the output gap and reflate the economy.’ (Clarida, 2013, p. 28)
6. Literature on the Federal Reserve handling QEP
Author Year Research Result
Title: ‘Asymmetric effects of monetary policy with or without quantitative easing: empirical evidence for the US’
The Journal of Economic Asymmetries 10 (2013) 1–9
Karras, Georgios
2013 ‘This paper asks whether the effects of Quantitative Easing are subject to the asymmetries that have been established for more conventional monetary policies. Using US quarterly data from the 1950–2011 period, monetary base shocks and their effects on real GDP and industrial production are estimated.’ (Karras, 2013, p.1)
‘A generally held view is that, by providing ample liquidity, this vigorous policy of Quantitative Easing helped prevent a repeat of the mistakes made during the Great Depression, and thus averted a deepening of the 2007–2009 recession.’ (p. 1.) First, the paper’s findings strongly support sign asymmetry: with or without Quantitative Easing, monetary base contractions have larger effects than monetary base expansions (the effects of which are often statistically insignificant). This characterizes both permanent and temporary (four-year) shocks to the monetary base. Second, there is also evidence of size asymmetry: the effectiveness of monetary base shocks declines with their size. Size asymmetry is found for both positive and negative monetary base shocks, but it appears to be stronger for negative shocks.’ (Karras, 2013, p. 1)
Title: ‘Four stories of Quantitative easing’
In Federal Reserve Bank of St. Louis Review, January/February 2013 Vol. 95, No. 1, pp. 51-88 Fawley,
B.W., Neely, C.J.
2013 ‘This article describes the circumstances of and motivations for the quantitative easing programs of the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan during the recent financial crisis and recovery.’ (Fawley, 2013, p. 51)
Explain that: ‘ Central Banks typically conduct monetary policy through control of short-term nominal interest rates that can potentially affect the economy through a variety of channels. Because inflation expectations do not immediately react one for one to changes in nominal interest rates, central banks can also control real interest rates, at least over the short to medium term. The typical assumption is that monetary policy changes real (inflation-adjusted) short-term rates to influence economic decisions through their effect on other asset prices. That is, real interest rates will change asset-prices in such a way as to change the willingness of banks to lend, firms to invest, or individuals to consume or invest in housing. Thus, a change in short-term real interest rates potentially influences the level of output and employment.’ (Fawley, 2013, p. 51)
‘the programs initially attempted to alleviate financial market distress, but this purpose soon broadened to include achieving inflation targets, stimulating the real economy, and containing the European sovereign debt crisis. The European Central Bank and Bank of Japan focused their programs on direct lending to banks- reflecting the bank-centric structure of their financial systems- while the Federal Reserve and the Bank of England expanded their respective bases by purchasing bonds.’ (Fawley, 2013, p. 51.)
Title: ‘Monetary policy strategy: lessons from the crisis’
NBER Working Paper No. 16755 February 2011. JEL No. E44,E52,E58,G01.
Mishkin, F.
2013 ‘This paper examines what we have learned and how we should change our thinking about monetary policy strategy in the aftermath of the 2007-2009 financial crisis. It starts with a discussion of where the science of monetary policy was before the crisis and how central banks viewed monetary policy strategy. It will then examine how the crisis has changed the thinking of both macro/monetary economists and central bankers. Finally, it looks how much of the science of monetary policy needs to be altered and draws implications for monetary policy strategy.’ (Mishkin, 2013, p. 1)
‘..there is a stronger case for monetary policy to lean against credit bubbles (but not asset-price bubbles per se), rather than just cleaning up after the bubble has burst. Using monetary policy to pursue financial stability goals is not an easy task, however, and research on how to monitor credit conditions so that it decisions to use monetary policy to restrict excessive risk are based on the correct information will be a high priority for research in the future. Finally, the financial crisis has made it clear that the interactions between the financial sector and the aggregate economy imply that monetary policy and financial stability policy are closely intertwined.’ (Mishkin, 2013, p. 48)
7. Monetary Policy and Fiscal Policy according to the Mundell-Fleming model will stimulate private investment on the short run
Private investment depends on certain factors. It depends on the trustworthiness people have in the economy and in the banking system, on the tax rates, on the interest rates, on the currency fluctuations and it depends on the savings rate. Population aging could also be a cause for changes in savings’ behavior; this is because older households are less sensitive to income shocks (Iwaisako, 2010). According to the life cycle model of consumption and saving,
population aging will increase short-run actions in the saving rate. Since Japan has a shrinking population we will have to take this into consideration with respect to the short-run effects. However the saving rates have been decreasing since Abe has been elected in December 2013, and ‘Abenomics’ has now become the new policy. Therefore the above considerations are lifted because the economic prospects are now positive. The decreasing savings rate leads to the assumption that money is either invested or consumed. Japans’ workers savings8 averaged 11.37% from 1970 until 2013, that reached to a high of 48.30% in December of 1997 and a record low of -9.90% in May of 2012, because of deflation (Trading economics, 2013). Since the interest rate has always been low in Japan, you see that this workers savings’ rate is averaged between 0 en 20 percent.
In the Minutes of the Monetary Policy Meeting of April 3 and 4 (2013), it is explicitly stated that the confidence and trust in ‘Abenomics’ cause the savings rate to decrease, and have stimulated investment and consumption. It is also stated that the wages of large firms - at least those of which the wages are adjustable on the short-run - have increased and that expectations are that wages will increase in the future. The extent of confidence of people in the stability of their incomes actually determines their spending behavior. Therefor consumer confidence can serve as an indicator for the shape of the economy. It measures the degree of optimism that the consumers feel about their personal situation and their expectations and trust in the economy. Consumer confidence has increased according to data of trading economics (2013). In diagram 1 the black curve represents Japan’s consumer spending and the red line in this diagram shows consumer confidence. Consumer confidence reflects the state of the economy. The crisis of 2007 is actually shown by the decrease of consumer confidence between 2007 and 2009. In 2011 there is a
8 The workers savings rate from Trading economics (2013) is the ratio of Japanese income that is saved to the net disposable income during a certain period of time.
decline again in consumer confidence, which is related to the Fukushima Daaichi nuclear
disaster, which also caused consumer spending to decrease during both periods. The expectations that wages will increase, that is referred to in the meeting of the BOJ in April 2013, could also have an increasing spending and investment reaction. That consumption has increased is shown in this diagram. This could be the case since wages expectations and consumer confidence have increased.
Diagram 1. Consumer spending and the consumer confidence only available from 1994-2013. Source: trading economics (2013).
The fact that the long-term prime rate9, has increased, could also cause savings to increase. Since this is not the case (diagram 2), inflation expectations and investment opportunities might
withhold savings. The increasing long-term prime rate causes private sector loans to decrease.
The fact that the increased government spending and QEP increased wages expectations, increased consumer confidence, decreased consumer saving and increased consumption, could lead us to the conclusion, that the new election of Abe and his policy has had a positive effect on the private investments and consumption on the short run.
Diagram 2. Loans to private sector and Japan’s consumer confidence data only available from 1991-2013. Source: trading economics (2013).
8. Quantitative Easing will stimulate welfare
As mentioned before, quantitative easing has been the BOJ’s target from 2001 until 2006. The difference between the quantitative easing then and that of the current ‘quantitative and
qualitative easing’ is that in 2006 the BOJ only bought short term bonds and thus replaced cash with cash (Posen, 2013). Now under the QEP policy the BOJ is buying different bonds with longer yields, namely bonds at yields of 10 or more years. Therefor economists, like Adam Pose agree, that QEP, this time, will have an effect on recovery of Japan’s negative inflation rate and will have an impact on welfare. Adam Posen (2013) is of the opinion that the deficit is risky and advises that Japan over time raises consumption tax to overcome that the net debt to GDP will stay below the growth market rate. The overall goal is to try to change investment behavior. Brian Sacks and Jim Toben are also outspoken about changing the private portfolios that BOJ will postpone with the new policy. To stimulate welfare ‘Abenomics’ has to stimulate demand (export), production, jobs, income and eventually welfare. Trading economics (2013) in diagram 3 shows Japanese export and import from 1985-2013. You see that the curves move alike. You also see that Japan has been in a net export deficit for a long time now.
Diagram 3. Japan’s exports and imports from 1985-2013. Source: trading economics (2013)
Net export has been in surplus from 2004 until the global and financial crisis hit Japan,
beginning 2008. Since 2008 the demand for Japanese products has been decreasing, resulting in Japan’s trade deficit. Japan imports more than it exports. Diagram 4 from trading economics (2013) shows the balance of trade for Japan, showing that Japan is still in a net export deficit.
For ‘Abenomics’ it is important that the positive effect of a currency decrease is obtained by an increase in export demand. Therefore it is important for Japan that the countries who import from Japan, recover, and that their demand will get back in place.
The BOJ summarizes in their analysis in the minutes of the monetary policy meeting (April, 2013), how the rest of the world is recovering from the financial crisis. Recovery of the US economy causes recovery of the demand for Japanese products. This also applies to China and the rest of the Asian countries. However, they believe recovery will take some extra years for the European Union because of the prolonged European debt problem.
With the Mundell-Fleming model with a flexible exchange rate, the IS curve will jump up because of the fiscal policy of the government of Japan. Output will rise, interest rates will rise, (interest rates become higher than the world interest rate), the demand for interest bearing assets will rise, and net export will increase. Since the CB does not hold the money supply constant there will be no issue of complete crowding out. Since inflation (prices) are held constant at a target rate of 2% the exchange rate would not be forced to appreciate just enough to reduce the net exports by as much as government expenditures increased, leaving aggregate demand unchanged. The price stability target and the increased government expenditures will lead to the fact that the Japanese people will have more money to spend. Since the interest rate has
increased, the Japanese could put the money in the bank. But as the Japanese people now have the expectation of future inflation they might rather spend their money or invest elsewhere now they expect money to lose value. The combination of the fiscal expansion and the fact that the global economy is recovering from the crisis causes the demand for Japanese products to pick up and Japanese demand (imports) to increase. The Japanese economy is picking up, resulting in an increase of the welfare for Japan.
The monetary policy of the BOJ (quantitative easing) will cause the LM curve to shift to the right since the bank is buying long-term government bonds and other bonds, causing the
monetary base to increase. The bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen (BOJ). The amount outstanding at the end of 2012 was 138 trillion yen. Expectations of the BOJ are, that at the end of 2013 around 200 trillion yen, and 270 trillion yen at the end of 2014 (trading economics) will be reached. The BOJ also encourages a further decline in interest rates across the yield curve
and will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen. The monthly flow of the JGB purchases is expected to become around 7 trillion yen on a gross basis (BOJ).
An increase in the ETF and Japan’s real estate investment trusts (J-REIT) purchases, would lead to an increase of their amount outstanding at an annual pace of 1 trillion and 30 billion yen respectively (BOJ meeting 2013), due to the fact that the risk premia of the asset prices will be lowered. ‘As for CP and corporate bonds, the BOJ will continue with those asset purchases until their amounts outstanding reach 2.2 trillion yen and 3.2 trillion yen respectively; thereafter, it will maintain those amounts outstanding. The upper limits (i.e., the single issuers’ amounts outstanding) of CP, corporate bonds, ETFs, and JEITs to be purchased by the BOJ shall be the same as before’ (BOJ meeting, 2013, p.2).
Price stability target of 2%, as long as it is necessary for maintaining the target in a stable manner and quantitative and qualitative easing will be continued (BOJ, 2013).
The shift of the LM- and the IS curve will result in an overall new equilibrium with higher national income and output and a higher interest rate for Japan. Teamwork between Abe and the BOJ could influence where the new equilibrium is set.
Since QEP will cause the Japanese government to have increased debt, Japan, on the medium and long term will have to increase taxes and this on its turn will have an impact on the welfare of the people in Japan.
On the short term QEP has a positive impact on welfare, since it enables government
expenditures to increase whilst the tax rate is held constant by the government. However when the tapering of the QEP will be initialized, the government will be left with a major debt. This will resolve that the Japanese people will have to contribute more to the government as a result of increased taxes. This will decrease welfare for Japanese people. However since QEP
stimulated welfare, the effect is neutralized.
Quantitative easing will stimulate welfare on the short to long term for the Japanese people. On the other hand it will decrease welfare for the Japanese Government on the medium- to long term.
9. ‘Abenomics’ will stimulate inflation on the short run
Japans’ core inflation rate10 was about an average of -0,6 before ‘Abenomics’, and is currently still in deflation at a value of -0,2 (trading economics, 2013). Data of the World data bank (2013) on the inflation rate of Japan are shown in table 4, where it shows that Japan has been in a
deflation for 18 years now. The current inflation rate of -0,2% is lower than the deflation rate of last years’ deflation rate of -0.9. It shows that there are signs of improvement. On the short run ‘Abenomics’ does not stimulate inflation. This will be the case for the medium to long term.
1985 1986 1987 1988 1990 1989 1991 1992 1993 1994 1995 1996 1997 1998 1999 1,005 1,777 -0,106 0,332 2,265 2,227 2,606 1,588 0,437 0,115 -0,725 -0,557 0,595 -0,054 -1,274 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -1,248 -1,198 -1,550 -1,715 -1,352 -1,251 -1,121 -0,931 -1,265 -0,500 -2,164 -1,879 -0,885
Table 4. Inflation, GDP deflator (annual %) Japan. Source World data bank (2013)
10. ’Abenomics’ will stimulate inflation on the long run
The DAD-SAS model explains that when a shift in the money growth increases, the dynamic aggregate demand curve shifts up under flexible exchange rates. The DAD curve is π = μ – bY + bY-1 + h (ΔiW + Δεe)11. The SAS curve depends on the expected inflation; π = πe + λ (Y - Y*).
The equilibrium aggregate supply (EAS) is Y=Y*12, and the equilibrium aggregate demand (EAD) is π = μ under flexible exchange rates. First the DAD increases. This is because this line represents the equilibrium of the Mundell-Fleming model. This causes that the expected inflation (πe) increases, which causes the SAS to increase. This process continues with an overall spiral coming to an equilibrium with inflation, instead of the old deflation, and at a point where EAD=EAS. In the long run, inflation will be the prospect for Japan through DAD-SAS model. DAD-SAS model can be traced back to the Mundell-Fleming model, and vica versa. The shift of the DAD corresponds with the equilibrium change of the Mundell-Fleming model.
I. How can ‘Abenomics’ achieve its goals?
The manufacturing sector continues to show a lacklustre performance, exports have been picking up, business fixed investment has stopped weakening and shows signs of picking up, corporate
10 The Statistics Bureau of Japan reports the core inflation rate that tracks changes in prices that consumers pay for a basket of goods. From this basket are the volatile price items excluded.
11 π = the inflation, μ= the money growth, b=is parameter that determines how investments change in prospect to income , Y=current production=income, Y-1=last periods income, h=elasticity of demand for money , ΔiW =change in world interest rate, Δεe=change expected purchasing power parity, expected rate of technological progress
profits have improved, public investment has continued to increase, housing investment is picking up, private consumption has remained resilient, development in demand both at home and abroad, industrial production is increasing moderately, and overall business sentiment has been improving (BOJ, 2013). These are all positive signs of ‘Abenomics’ that are currently taking place that insinuate that ‘Abenomics’ is starting to work. To see how fiscal policy can achieve economic growth diagram 5 of data from trading economics (2013) shows the
government debt to GDP13 and the Japanese consumer spending. Here it is shown that both are correlated. When government debt increases whereby government expenditures increase, consumer spending will be stimulated. Therefor we will see that when the Japanese government will start spending more, fiscal expansion will be growing, consumer spending will be stimulated further and will resolve that this will be successful in contributing to economic growth.
Diagram 5. Japan’s government debt to GDP and Consumer spending 1985-2013. Source: trading economics (2013) GDP per capita has already grown 2,15%, from 2012 until current GDP (trading economics, 2013). As data shows, GDP growth rate had been circulating around zero for the last 12 years. During 2009-2010 a decline of 4% can be linked with the global crisis and the decline in 2011 is caused by the Fukushima Daaichi nuclear disaster. In the first quarter of 2013 the GDP
expansion was 1%, up from last month's preliminary reading of 1% (trading economics, 2013).
13
The Gross Domestic Product per capita on Trading economics (2013) shows the GDP at the purchaser’s prices in the constant year 2000 US dollars that is divided by the midyear population. The GDP at purchaser’s prices is the sum of the gross value that is added by all Japanese resident producers in the economy, plus any product taxes, and minus any subsidies that are not included in the value of the products. This is without any deductions for depreciation of fabricated assets, or deductions for depletion and denigration of natural resources (Trading economics, 2013). The dollar figures for the GDP are converted from domestic currencies using the years’ 2000 official exchange rates.
Note that this is caused by a picking-up of Japanese exports and a strong increase of the household spending. Since GDP per capita is increasing, we could insinuate that Japan’s GDP annual growth rate14 will increase in the future.
To judge if ‘Abenomics’ will be successful in achieving its goals, a comparison will be made between the US and Japan. This comparison will be with the QEP of the Federal Reserve (FED) under Ben Bernanke, which was aimed at getting the US out of the crisis and create economic stability. It was successful in getting the economy back on track. We compare the government spending, fiscal expansion, and the monetary base between both countries.
Signs of fiscal policy are reflected by government spending. When we take a look at diagram 6, where government spending for both countries is put into picture, we see that the US government started to increase expenditures around January 2013; this is shown by the red line. You see that over the years from 1985 until 2013 government expenditures have shown similar signs between both countries. The US decreased government expenditures from 2010 until 2012. When they started to massively increase fiscal expansion in 2013 in combination with QEP, signs of recovery of the economy started to show. This may be proof that a combination of fiscal and monetary policy achieves economic growth. This may be the reason why the QEP of the US is so successful, since it is combined with fiscal expansion.
Diagram 6. Japan versus the US on government spending 1985-2013. Souce: trading economics (2013)
14 The annual growth rate in Gross Domestic Product measures the increase in the value of the goods and services produced by the economy over the period of a year.
The monetary policy, (the QEP) of the US is shown by the increases of M0, shown by the red line in diagram 7. The black line is the monetary base of Japan. In this diagram it shows that the FED has increased monetary base since 2008 and has continued doing so until now. You see a jump of an increase of more than threefold of the monetary expansion.
Diagram 7. Japan versus the US on monetary base 1985-2013. Source: trading economics (2013)
The best signs of economic recovery, as mentioned before, were actually the case when the US government increased expenditures. The monetary policy, which started in 2010, shows a correlation with the GDP growth rate. You see that when monetary policy started, GDP growth rate also started to grow. In 2009 the GDP annual growth rate for the US came to a low of – 4%. This was restabilized by the monetary policy of the US, which started in 2010. From that
moment onwards GDP growth rate rose back to an average of 2% between 2010 and 2012. It started to decrease again in 2012, which was restabilized by the increased government spending mentioned above. Japan’s GDP annual growth rate and that of the US show same movements. Japan’s GDP annual growth rate is only a lot higher than the US. It is shown that Japans growth rate is not enough yet to get Japan out of deflation.
For Japan to overcome deflation and get at the target of 2%, GDP annual growth rate will have to increase such that the Government debt to GDP will decrease. This is proven by diagram 8 where it shows that Japan’s government debt to GDP is much higher than that of the US. This
higher government debt to GDP looks worrying, however contrary to the US, Japan has a net export surplus, where the US always has had a net export deficit. Hopefully ‘Abenomics’ will cause GDP annual growth rate to increase enough, so that the government debt to GDP will decrease and Japan can start increasing taxes, thereby decreasing government debt.
Diagram 8. Japan versus the US in government debt to GDP 1985-2013. Source: trading economics (2013)
Posen (2013) reflected on ‘Abenomics’ in an interview in the NHK World in May 2013 on the difference between the policy program set in 2003 under Koizumi and Takenaka and that of Abe in 2003. The BOJ did not want to cooperate with the monetary policy set next to the fiscal and structural policy. Adam Posen suggests therefore that ‘Abenomics’ can be successful since now the BOJ does support the monetary policy. He addresses that the fiscal policy will be risky since it will increase Japanese government debt even further. He is of the opinion that Japan should raise taxes on the long term and not on the short term since this will cut off recovery. If taxes would be increased on the short to medium term, this will result in inflation without economic growth. This is bad for the government and for the households. He mentions that one key
component is missing, which needs to be addressed more explicit and aggressive. Women should be gotten back at the workforce and use should be made of the skilled women that Japan has. He furthermore presents a list of policies that are to be addressed, amongst others: childcare
incentives, and having workers who are out of (permanent) job getting back into the workforce. These according to Posen are the single biggest things Japan could do for its competitiveness. TPP negotiations will influence agriculture, which will help support trade and infrastructure. If this is done right, he puts it: this could be the beginning of the end of the lost decades.
I agree with Adam Posen that the high debt to GDP of Japan is really risky. The way I put it, if the demand for export of Japanese products will be picking up because the rest of the world countries will recover from the crisis, this will stimulate Japans’ economy enough to maintain a high economic growth and increased GDP that government debt relatively will decrease in prospect to the annual GDP and on the long run, the Government will increase taxes and cut back on expenses to decrease government debt.
II. What will be the impact of ‘Abenomics’ on Japan’s economy
Overall we have seen that ‘Abenomics’ will stimulate economic growth. The inflation will be stimulated by the increased demand for Japanese export products. When the ‘tapering’ of the QEP will start, the BOJ will slowly start by decreasing investing in JGBs, to eventually stop buying JGBs. Expectations are that this will increase the interest rate and will stimulate inflation even further. The problem will be, that if inflation will increase relatively faster than the rest of the worlds’ currencies, it can result in a decreasing net export. When quantitative easing has played its part, the Japanese government is left with an extremely high level of debt. Inflation could be an advantage in this stadium since it will make the debt relatively less valuable. The Japanese government will have to increase taxes to pay back debt, however, this is only possible when economic growth per GDP is higher than the net debt to GDP. On the long run the
economies of Europe area will be expected to eventually come out of crisis, their future demand for Japanese export products will increase, and this will provide Japan with an even higher net export increase, which could provide the extra increase in economic growth making the government of Japan able to increase taxes. On the long run the economy of Japan will face inflation, economic growth, increased welfare, increased investment, and an increased output perspective, which will only be combined with a high government debt.
III. How will the surrounding Asian countries suffer from Japan’s monetary and fiscal policy?
The currency change will affect the Asian surrounding countries. On the short run, when Japan is in deflation, it will result in the Asian countries loosing trade benefit, since Japans’ products are relatively cheaper. This will have a negative short run effect for the surrounding Asian
can import relatively more cheaply. This is however outweighed by decreased demand of their products that results in a decreasing production, income, and economic growth. When the yen will increase in value, the surrounding Asian countries will start benefitting from their relatively lower prices. Also when Japan is increasing in welfare, Japanese demand for products will increase, therefore increasing demand for imports, meaning that demand for the surrounding Asian counties’ products will increase. This increases Asian production, income, and welfare, and eventually allowing them more economic growth. Therefore when Japan will get to
economic growth and an inflation target of 2% this will benefit the surrounding Asian countries. On the very short run will the Asian countries suffer, however on the medium-to long run the Asian countries will benefit from the fact that Japan has recovered.
11. Conclusion
In this paper it is found that monetary policy and fiscal policy according to the Mundell-Fleming model will stimulate private investment on the short run. It is found that the policies have
increased consumer confidence, investments, wages expectations, inflation expectations, trust in the banking system and decreased savings-rate. The overall prospects are good indicators that ‘Abenomics’ is successful in achieving these goals on the short run. The QEP increases the monetary base, which has caused that the yen, loses its value. Data show that Japan is still in deflation, however in a lower deflation then beforehand. This negative inflation stimulates the export, since Japanese products appear relatively cheaper. Since demand for Japanese products is picking up, because the rest of the world is showing signs of recovering, the trade deficit has economic prospects that this deficit will be reversed in a few years, back to a trade surplus. This will over all stimulate welfare. It is found that ‘Abenomics’ will not stimulate inflation on the short run. Inflation on the short run is not stimulated since the BOJ is increasing monetary base, which decreases the currency value. However ‘Abenomics’ will stimulate inflation on the medium- to long run, since the fiscal expansion encouraged Japanese people to invest more. Together with the increased consumer confidence on overall increased demand for Japanese exports, increased Japanese wages, increased Japanese consumption, will increase Japanese production and will resolve that Japan will face inflation. This leads to one of the most important questions in this paper, will ‘Abenomics’ achieve its goals and how?
In this paper a judgment is made based on a comparison with the QEP of Ben Bernanke of the FED and it appears that the only way how this can be achieved for Japan is by making sure that the annual GDP per capita is increased so much that government debt to annual GDP per capita rate is relatively decreased leaving the possibility for Japan to increase taxes on the medium to long term to make sure government debt has future prospects of decreasing. When this will be the case and Japan will face the inflation target at 2%, with the combination of economic growth, the surrounding Asian economies will benefit big since Japan will start picking up and start increasing demand for products of the surrounding Asian economies, which will resolve that the Asian countries will grow on behalf of the Japanese recovery.
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Appendix
Appendix 1. Key terms and definitions
Abbreviation In full Definition
BOJ Bank of Japan The Bank of Japan is the Central Bank of Japan
CAB Current Account Balances ‘Difference between a country's total exports of goods and services, remittances from the migrant workers, and aid grants, but not capital inflows or outflows. A component of balance of payments, it is a measure of a country's competitive strengths and indicates the stability of its currency’ (Business Dictionary, 2013).
CP Commercial Paper ‘Promissory note (issued by financial institutions or large firms) with very short-to-short maturity period (usually, 2 to 30 days, and not more that 270 days), and secured only by the reputation of the issuer. Rated, bought, sold, and traded like other negotiable instruments, commercial paper is a popular means of raising cash, and is offered generally at a discount instead of on interest bearing basis. Also called paper’ (Business Dictionary, 2013).
CPI Consumer Price Index ‘A measure of changes in the purchasing power of a currency and the rate of inflation. The consumer price index expresses the current prices of a basket of goods and services in terms of the prices during the same period in a previous year, to show effect of inflation on purchasing power. It is one of the best-known lagging indicators’ (Business Dictionary, 2013).
QEJ Quantitative Easing Policy
of Japan
It refers to the quantitative easing policy Ueda (2011) is mentioning in the text, during earlier period in Japan. See definition QEP.
QEP Quantitative Easing Policy ‘The term quantitative easing describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and or interbank interest rate are either at, or close to zero’ (Business Insider, 2010).
ZIRP Zero Interest Rate Policy This is referred to a policy outperformed by the BOJ to hold the interest rate at zero.
Appendix 2. Key themes proposed by the headquarters for Japan’s economic revitalization
Appendix 3. Main areas of focus for regulatory reform panel
