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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Where Labour has no chance, hold your nose and vote Lib Dem

May's gamble, MacKenzie's obsession and Wisden obituaries - Peter Wilby's First Thoughts.

In 2007 Gordon Brown allowed rumours to circulate that he would call an early general election for the spring of 2008. When he failed to do so, he was considered a coward and a ditherer and never recovered. Theresa May has tried a different strategy. After firmly denying that she would call an early election and killing off speculation about one, she suddenly announced an election after all. Will this work better for her than the opposite worked for Brown?

The Prime Minister risks being seen as a liar and an opportunist. Her demand for “unity” at Westminster is alarming, because it suggests that there is no role for opposition parties on the most important issue of the day. If Labour and the Lib Dems are smart enough to co-operate sufficiently to rally the country against what looks like an attempt to instal an authoritarian, right-wing Tory regime, May, even if she wins the election, could find herself weakened, not strengthened. I never thought I would write this but, in constituencies where Labour has no chance, its supporters should hold their noses and vote Lib Dem.

Taken for granted

I wonder if May, before she took her decision, looked at the precedents of prime ministers who called unnecessary elections when they already had comfortable parliamentary majorities. In 1974, after three and a half years in office, Edward Heath, with a Tory majority of 30, called a “Who runs Britain?” election during a prolonged dispute with the miners. He lost. In 1923, Stanley Baldwin, a new Tory leader sitting on a majority of 75 obtained by his predecessor just a year earlier, called an election because he wished to introduce tariffs, an issue strikingly similar to the one raised by Brexit. He also lost. The lesson, I think (and hope), is that prime ministers take the electorate for granted at their peril.

China’s long game

Commentators compare the crisis ­involving North Korea and the US with the Cuban missile crisis of 1962. It doesn’t feel that way to me. For several days that year, nuclear war seemed, to my 17-year-old mind, all but inevitable. I went to the cinema one afternoon and felt surprise when I emerged three hours later to find the world – or, at least, the city of Leicester – going about its business as normal. Two nuclear powers were in direct confrontation. The US threatened to invade communist Cuba to remove Soviet missiles and blockaded the island to prevent deliveries of more weapons. Soviet ships sailed towards the US navy. It wasn’t easy to imagine a compromise, or who would broker one. Nobody doubted that the two sides’ weapons would work. The Soviet Union had carried out nearly 200 nuclear tests. North Korea has claimed just five.

For all the talk of intercontinental missiles, North Korea at present isn’t a credible threat to anybody except possibly its neighbours, and certainly not to the US or Britain. It is in no sense a geopolitical or economic rival to the US. Donald Trump, who, like everybody else, finds the Middle East infernally complicated, is looking for an easy, short-term victory. The Chinese will probably arrange one for him. With 3,500 years of civilisation behind them, they are accustomed to playing the long game.

Mussel pains

Whenever I read Kelvin MacKenzie’s columns in the Sun, I find him complaining about the size of mussels served by the Loch Fyne chain, a subject on which he happens to be right, though one wonders why he doesn’t just order something else. Otherwise, he writes badly and unfunnily, often aiming abuse at vulnerable people such as benefit claimants. It’s a new departure, however, to insult someone because they were on the receiving end of what MacKenzie calls “a nasty right-hander”, apparently unprovoked, in a Liverpool nightclub. He called the victim, the Everton and England footballer Ross Barkley, who has a Nigerian grandfather, “one of our dimmest footballers” and likened him to “a gorilla at the zoo”.
The paper has suspended MacKenzie, a former Sun editor, and Merseyside Police is investigating him for racism, though he claims he didn’t know of Barkley’s ancestry.

Several commentators express amazement that Sun editors allowed such tripe to be published. It was not, I think, a mistake. Britain has no equivalent of America’s successful alt-right Breitbart website, disruptively flinging insults at all and sundry and testing the boundaries of what it calls “political correctness”, because our alt right is already established in the Sun, Express and Mail. To defend their position, those papers will continue to be as nasty as it takes.

Over and out

Easter is the time to read the cricket annual Wisden and, as usual, I turn first to the obituaries. Unlike newspaper obituaries, they record failures as well as successes – those who managed just a few undistinguished performances in first-class cricket and, most poignantly, some who promised much but died early. We learn of a 22-year-old Indian who, during demonstrations against the alleged molestation of a schoolgirl, was shot dead by police and whose grieving mother (invoking the name of one of India’s greatest batsmen) cried, “Bring my Gavaskar back!” In England, two young men drowned, having played one first-class match each, and a 22-year-old Sussex fast bowler, described as “roguish” and “enormously popular”, fell off a roof while celebrating New Year with friends in Scotland. In South Africa, a young batsman was among five municipal employees killed when their truck crashed; the local mayor fled the funeral as his workmates “chanted menacingly” about unpaid wages.

Among the better-known deaths is that of Martin Crowe, probably New Zealand’s best batsman. In a Test match, he once got out on 299 and reckoned the near-miss contributed to the cancer that killed him at 53. “It tore at me like a vulture pecking dead flesh,” he said. Cricket can do that kind of thing to you. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 20 April 2017 issue of the New Statesman, May's gamble

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