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Can Abenomics Succeed? Overcoming the Legacy of Japan’S Lost Decades

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Can Abenomics Succeed? Overcoming the Legacy of Japan’S Lost Decades Can Abenomics Succeed? Overcoming the Legacy of Japan’s Lost Decades Dennis Botman, Stephan Danninger and Jerald Schiff IMF © 2015 193 pages [@] Rating Take-Aways 8 Importance • Japan has traveled an extraordinary and unique economic journey since the 1980s. 8 Innovation • Strong deflationary pressures and a lack of demand have afflicted Japan since the 6 Style 1990s. 7 Japan’s central bank was a pioneer in quantitative easing, which it started in 2001. • • Although its nominal 2013 GDP was 6% lower than it was in the mid-1990s, the nation Focus still boasts the world’s third-largest economy, with relatively low unemployment. • The “three arrows” of Abenomics, Japan’s economic recovery program, are “aggressive Leadership & Management monetary easing, flexible fiscal policy and structural reforms to raise potential growth.” Strategy Launched at the end of 2012, Abenomics has turbo-charged the Bank of Japan’s asset- Sales & Marketing • purchase program. Finance Human Resources • Japan is “aging in fast forward,” with the highest life expectancy globally, a slowing IT, Production & Logistics fertility rate and minimal immigration. Career & Self-Development • Japan plans to reform the protected agricultural sector and create special economic Small Business zones. Economics & Politics Industries • Abenomics aims to increase innovation, the corporate profit motive and risk taking. Global Business • Recent estimates say that Japan’s staggering 240% debt-to-GDP ratio will climb still Concepts & Trends further to 280% by 2030. To purchase personal subscriptions or corporate solutions, visit our website at www.getAbstract.com, send an email to [email protected], or call us at our US office (1-877-778-6627) or at our Swiss office (+41-41-367-5151). getAbstract is an Internet-based knowledge rating service and publisher of book abstracts. getAbstract maintains complete editorial responsibility for all parts of this abstract. getAbstract acknowledges the copyrights of authors and publishers. All rights reserved. No part of this abstract may be reproduced or transmitted in any form or by any means – electronic, photocopying or otherwise – without prior written permission of getAbstract Ltd. (Switzerland). 1 of 5 getabstract Relevance getabstract getabstract What You Will Learn How Japan’s economy has fared since the 1990s,r1) How Abenomics aims to bolster growth, 2) What outcomes Prime Minister Shinzō Abe’s policies have had as of 2015, and 3) How Japan’s economic future may unfold. getabstract Review Japan’s economic journey since the 1980s has been intriguing. In some ways, the country’s problems are unique, but it has also had to tackle issues similar to those of other Western nations, only more so – and first. To some, Prime Minister Shinzō Abe’s raft of reforms, called Abenomics, is a disconcerting mix of right-wing structural adjustments and left-leaning quantitative easing and massive deficit spending. While many of Abe’s proposed reforms seem uncontroversial and sensible, they also entail attempts to make corporations less prudent and more profit-hungry – an aspiration that may startle Western observers. Japan’s strengths – including the size of its economy, its robust currency and its global trading position – contribute to an economic picture that feels simultaneously extreme and logical. This compendium of essays by economists Dennis Botman and Stephan Danninger, professor Jerald Schiff and a team of area experts and International Monetary Fund contributors is quite dry in places, as you might expect, and the different contributors often go over the same ground – sometimes with slightly different conclusions. But their explanations are fascinating, and their top-notch factual content is comprehensive. getAbstract recommends this text to economists, executives and investors with the note that Japan’s economic progress may offer some important lessons for other countries. getabstract getabstract Summary getabstract getabstract Japan’s Lost Decades: Low Growth and Mild Deflation In the decades after World War II, the formidable success of Japan’s manufacturing and export sectors brought with it an extreme asset price bubble that began to implode around 1990. The economy was slowly starting to recover when the 1998 Asian financial crisis getabstract hit. It triggered a full-blown banking panic and severe credit crunch in Japan, and it “The last 20 years exposed the extent of the nonperforming loans hiding on corporate balance sheets. The have not been easy for Japan.” Great Recession pulled Japan back into recessionary territory again, and the 2011 Great getabstract East Japan Earthquake delivered another economic shock to the system. A particular and, in some respects, unlucky combination of factors culminated in strong deflationary pressures and a lack of domestic demand in Japan during its lost decades. These factors included a worldwide trend toward lower inflation and a frequently over-strong yen, thanks to Japan’s resilient exports, its people’s propensity for saving and the yen’s attractiveness as an inherently safe-haven currency in difficult economic times. During getabstract “Each time the that period, companies that were still performing well found that holding cash was more economy appeared attractive than investing. Tax revenue fell. Deflation generally undermined the functioning to get back on its of financial markets and reduced the effectiveness of using interest rates as a monetary tool. feet, adverse shocks such as the Asian financial crisis, the But as the strength of the yen illustrates, Japan doesn’t conform to the usual picture bursting of the dot-com bubble and the global of a country in trouble. Although its nominal 2013 GDP was 6% lower than in the financial crisis beset mid-1990s, the nation still boasts the third-largest economy in the world, with relatively the country.” getabstract low unemployment. It has steady productivity growth, a solid presence in growing Asian markets and a strengthening “upstream position” in international supply chains. For example, Japanese companies contribute an average 10% of the value added in China’s Can Abenomics Succeed? getAbstract © 2015 2 of 5 electrical equipment exports. So although Japan’s economy has worsened in some ways, its position in global trade has gone from strength to strength. getabstract Since recovering from its banking crisis in 2000, Japan has enjoyed a relatively healthy, “Persistent deflation… has costs as it stable financial system. It remains one of the largest providers of global liquidity, thanks undermines the effective to its current account surplus. Japan’s now-healthy banks earn 30% of their gross profits functioning of financial markets and the ability abroad, and they’re well-positioned to increase their lending to fast-growing Asian of macroeconomic economies. Even Japan’s staggering 240% debt-to-GDP ratio – the highest among the policies to stabilize the economy.” developed countries – is mitigated to some degree by the fact that domestic savers hold getabstract 90% of the government’s bonds. In 2013, Prime Minister Shinzō Abe’s administration launched an economic recovery program, dubbed Abenomics, which consists of “three arrows”: “aggressive monetary easing,” “structural reforms to raise potential growth” and “flexible fiscal policy.” getabstract Arrow 1: Aggressive Monetary Easing “The experience during the Lost Because of its unusual economic history, Japan’s central bank was a pioneer in quantitative Decade suggests that… easing (QE), starting its program in 2001. In 2006, Japan went through a tapering scenario, a higher inflation target and more where it demonstrated the value of clear forward guidance and a transparent, flexible QE aggressive monetary policy. easing…would have substantially improved the economy’s More recent studies conclude, with the benefit of hindsight, that Japan’s unusually low performance.” getabstract inflation during the lost decades required more easing than the central bank undertook. The nation’s “stop-go fiscal stimuli” did little good in the first lost decade. Experts say, however, that QE did work to some degree in that period, since equity markets strengthened and volatility declined. The purchase of private company assets reduced risk premiums, showing how “the composition of asset purchases matters.” Quantitative easing suppressed the interest rates on government bonds and made commercial assets more attractive, thereby inducing portfolio rebalancing toward more growth-producing investments. getabstract “Once the health of the banking sector Abenomics turbo-charged the Bank of Japan’s asset-purchase program. A target of 2% improved…these [QE] measures also started to inflation is central to its forward guidance approach The central bank has increased its show some effectiveness purchases of new government bonds from the 70% it was already buying, with the aim of in supporting real doubling Japan’s monetary base to 54% of GDP, “with greater emphasis on longer-dated activity.” getabstract government securities and expanding purchases of risk assets, such as commercial paper [and] corporate bonds.” The magnitude of the QE push in 2013 increased annual purchases of Japanese government bonds from ¥50 trillion to ¥80 trillion. Japan has demonstrated the significance of forward guidance in communicating monetary policy. When lowering interest rates no longer has an impact and the financial system is weak or risk averse, information from central bank authorities becomes critical, since only getabstract
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