Abenomics seems to be working

Lee Jong-Wha, former chief economist at the Asian Development Bank, talks about Japan's economic policy.

Japanese Prime Minister Shinzo Abe’s economic agenda – dubbed “Abenomics” – seems to be working for his country. Expansionary monetary policy is expected to inject liquidity into the Japanese economy until inflation hits the Bank of Japan’s 2 per cent target, while expansionary fiscal policy is expected to continue until economic recovery takes hold.

As a result, consumer and investor confidence is returning. The Japanese stock market has soared more than 40 per cent since November of last year, when it became clear that Abe would form the next government, and exports and growth are also picking up. With a large output gap and low inflationary pressure, expansionary policies show great potential for reviving economic activity.

But other countries – including neighboring Asian economies – fear that Japan is devaluing the yen to bolster exports and growth at their expense. Some have accused Japan of fueling a global “currency war.” Anticipation of aggressive monetary expansion has sharply weakened the yen, which has fallen by almost 20 per cent against the dollar in just over four months.

Of course, Japan’s escape from its 15-year deflationary trap and two decades of economic stagnation would be good for the world. Japan remains the world’s third-largest economy, the fourth-largest trader, and the third-largest export market for neighboring China and South Korea, which thus stand to benefit if “Abenomics” revitalizes Japanese domestic demand. More broadly, given Europe’s slide into recession and only a slow rise in world trade volume, renewed growth and stronger import demand in Japan would support global recovery.

The question now is whether Abenomics can achieve its goals without destabilizing the world economy, especially neighboring Asian economies. Doing so requires Japanese policymakers to focus on more sustainable growth while averting a vicious cycle of competitive devaluation and protectionism with Japan’s trade partners. In particular, expansionary monetary and fiscal policies – which are helpful in the short term – must be accompanied by fundamental structural reforms.

Japan’s deflation and economic stagnation over the last two decades stemmed largely from a dysfunctional financial system and a lack of private demand. The collapse of asset bubbles in the 1990’s left Japan’s financial system and private sector saddled with a huge debt overhang. Recovery began only after the balance-sheet weaknesses in the financial, household, and corporate sectors were addressed. Sustainable growth requires sustained private-sector demand.

Monetary easing and fiscal stimulus, combined with structural measures to restore private firms to financial health, would stimulate household expenditure and business investment. Indeed, the impact of real exchange-rate depreciation on growth is likely to be short-lived unless increased corporate profits in the export sector lead to higher household consumption and investment. And yet risks to financial and fiscal stability could arise if higher inflation and currency depreciation were to spoil investors’ appetite for Japanese government bonds, thereby pushing up nominal interest rates.

That is why the success of “Abenomics” hinges not on the short-term stimulus provided by aggressive monetary expansion and fiscal policies, but on a program of structural reform that increases competition and innovation, and that combats the adverse effects of an aging population.

Japan, of course, is not alone in using exchange-rate policies to keep exports competitive. Many emerging economies’ authorities intervene in currency markets to prevent exchange-rate appreciation and a loss of export competitiveness. But if Japan starts to intervene directly in global currency markets to ensure a weaker yen, neighboring competitors will respond in kind. The danger of a currency war and protectionism should not be underestimated.

In South Korea, the government and business leaders worry that a stronger won, which recently rose to its highest level against the yen since August 2011, will hurt key export sectors, including automobiles, machinery, and electronics. One report by a Korean research institute shows that the Korean economy will slip into recession if the yen-dollar exchange rate nears 118, its average level back in 2007.

Moreover, unlimited quantitative easing by the Bank of Japan, the Federal Reserve, and the European Central Bank also increases the risk of volatile capital flows and asset bubbles in Asian emerging economies. Chinese policymakers have raised serious concerns about the growing risks of inflation and property bubbles.

The rest of this story can be read on economia.

This is a news story from economia.

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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.