Enough is enough. That isn’t a bad shorthand description of Japanese prime minister Shinzo Abe’s new economic policy. Enough of lost decades, enough of deflation, enough of an over-valued yen, enough of wage stagnation, enough of the Bank of Japan’s (BOJ) “timidity.” More printing of money, more driving down the yen, more pay for workers, more spending by government. Add in some fundamental long-term regulatory reforms, and even longer-term changes in the anti-risk, lifetime job culture, and you have the reason for the rebirth of optimism in Japan.
We don’t know yet whether the prime minister will be proved right in telling President Obama at their White House meeting that “Japan is back”—Abe himself later admitted some uncertainty—but we do know that share prices have soared by about 40 percent; the yen has plunged by about 25 percent; housing starts jumped 8.7 percent in February; and the outlook in the auto sector is improving. All because the new head of the BOJ, Haruhiko Kuroda, has announced that he will just about double purchases of Japanese government bonds to $75 billion every month and “take all the measures imaginable” to break deflationary expectations and get the inflation rate up to 2 percent, from its current level of -0.6 percent. Think of his plan as a series of twos—2 percent inflation, in 2 years, a 2-fold increase in the monetary base, a 2-fold increase in purchases of bonds, and a (more than) 2-fold increase in the duration of the BOJ’s bond holdings. And, finally, two times the rate of expansion of the balance sheet relative to GDP as Bernanke has dared.
If he succeeds in fostering inflationary expectations, he would end the drag on consumer spending created by the contrary expectation—that waiting to spend pays off in lower prices tomorrow, a deeply embedded view that keeps some $8.8 trillion in cash and bank deposits stashed away by Japanese households.
By 2017, opine economists Klaus Baader and Kiyoko Katahira at Société Générale, “the deflationary psychology should at least have been eased, if not broken.” Economists at the Lindsey Group are not so sure. They point out that the Federal Reserve Board’s monetary policy committee has done exactly what the BOJ now plans to do, but inflation in the U.S. has not increased. “The BOJ cannot engineer sufficient additional inflation in Japan merely by expanding the money supply or lengthening its balance sheet….If America can’t do it, why should anyone expect Japan to be able to?” asks the consulting group.
But even the cautious Lindsey Group sees hope for an economic recovery. After his most recent of many visits to Japan, Larry Lindsey, former White House chief economist, concludes that “Something really feels different this time. … Abe is a political brand that …stands for something other than bringing home pork to the local constituency. … The ongoing confrontation with China over the Senkaku Islands … provides a natural catalyst around which Japanese can unite behind a man like Abe.”
Which brings us to the American reaction. One would expect that Abe’s plan to drive down the yen—the prime minister prefers to call it reflation to avoid censure by the G-20 for triggering a “currency war”—would not sit well in America. After all, the president has promised to do all he can to increase exports, which certainly won’t be made easier when Japanese consumers find that their depreciated yen buys fewer dollars, making American goods more expensive there, and consumers around the world find Japanese goods getting cheaper relative to American products. The now booming U.S. auto manufacturers can’t be delighted at the prospect of competing with Japanese car companies that can lower their prices and increase their profits as American consumers find their dollars buy more yen-based cars. And Obama’s trade union backers can’t be expected to cheer the employment effects that they perceive will follow an increase in Japanese imports.
To which the Japanese officials with whom I have had private meetings respond that a growing Japan is in America’s economic interests. Sure, the sinking yen gives Japanese manufacturers a bit of an edge. But it will be politically easier for an expanding Japan to open its markets to foreign goods and investment, to sell its voters on trade deals that involve some concessions by Japan, and to welcome foreign investment.
All of which is of more interest to economic policy types at the White House than it is to those concerned with foreign and security policy. Abe understands this, and emphasized on his visit here that “the trust and the bond in our alliance is back.” In their meetings with me, Abe’s supporters spoke of Japan’s willingness and ability to “support the U.S. forward military presence.” At their joint press conference the president cited “our concerns about the provocative actions that have been taken in North Korea.” He also declared that “the U.S.-Japan alliance is the central foundation for our regional security and so much of what we do in the Pacific region.”
Mr. Abe fell in line with that emphasis on security. The security environment in the Asia-Pacific region is “becoming more and more difficult”, he said, and the U.S. and Japan must cooperate “to secure an order in the region … [and] the freedom of the seas…. Concerning the South China Sea and the Senkaku Islands … the very existence of the Japan-U.S. alliance is a stabilizing factor.”
In short, American policymakers support Abenomics despite its possible negative economic effects here—denied by the Japanese—because the success of the Japanese economy, and of Abe who is friendly to us, is important to American interests in the Pacific region, especially now that North Korea is hurling threats of nuclear attacks on U.S. territory.
The question is: will Abenomics work? Possibly but not certainly: building inflationary expectations among businesses, so that they will raise wages, and consumers, so that they will spend more, is a daunting task, which Mr. Kuroda expects will take two years and doubters say is simply beyond the reach of monetary policy. Some say Mr. Kuroda knows this full well, and has in essence challenged the government—I’ve done my part, now you get on with deregulating labor and energy markets, and the health care sector. The prime minister runs several risks, of which he is well aware.
· Loose fiscal and monetary policy might unleash hyper-inflation that drives up the cost of servicing Japan’s huge debt, which stands at 200 percent of GDP.
· The falling yen might result in competitive devaluations by Japan’s competitors.
· Government stimulus spending—Y10tn is slated—might have little enduring effect on economic growth—a lower multiplier is the way economists put it.
· Plans to free up trade by joining the Trans-Pacific Partnership free trade area might be shot down by the mighty farm lobby.
Abe’s supporters say that these risks are far less than the risks of doing nothing. Not a bad way of making economic policy in a long-stalled economy.