Twice is enough (and don’t expect miracles)
Six weeks ago I read this post by Edward Hugh:
The question I would ask is this: given all the doubt which exists about the real roots of Japan’s problem, and the fact that it may well be a permanent structural problem and not a temporary liquidity trap one, is it really justified to run such a high risk, all-or-nothing experiment? Even Paul Krugman seems to have changed his assessment various times since the problem started and while he still fully supports the general approach being taken he now thinks the natural rate of interest may remain permanently negative and that fiscal stimulus might be necessary on a permanent basis (liquidity trap without end, amen).
What makes people like me nervous is the thought that if the central bank can’t deliver on its promise to deliver inflation, or if the Japanese voters decide they have had enough of the experiment, then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.
And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.” Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.
As far as I can see, all of this points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration. Hardly matters for central bank initiatives, and indeed ones for which Shinzo Abe, who naturally has given his name to this new economic trend, is singularly ill equipped to carry through. Japan needs a series of structural reforms – like those under discussion around the third arrow – but these would be to soften the blow of workforce and population decline, not an attempt to run away from it. Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.
The above is based on arguments fleshed out in much more detail in my “mini book” the A B E of Economics.
Then today Tyler Cowen directed me to this brand new post by Edward Hugh:
On the other hand the administration still has to decide whether to go ahead with next year’s additional tax hike. The government is caught in a double bind, since if it doesn’t raise the consumption tax as planned and cuts spending to compensate then the economy will still contract. And if it doesn’t do either of these things then the debt level will continue its march upwards. At the moment the government is mulling the idea of raising the tax and doing a 5 trillion yen ($47 billion) additional stimulus to compensate. Which sort of leaves me wondering why they want to raise the tax in the first place.
What makes people like me nervous is the thought that if the central bank can’t deliver on its promise to deliver inflation and revive the economy, or if the Japanese voters decide they have had enough of the experiment, then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.
And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.” Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.
As far as I can see, all of this points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration. Hardly matters for central bank initiatives, and indeed ones for which Shinzo Abe, who naturally has given his name to this new economic trend, is singularly ill equipped to carry through. Japan needs a series of structural reforms – like those under discussion around the third arrow – but these would be to soften the blow of workforce and population decline, not an attempt to run away from it. Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.
The above analysis is based on arguments fleshed out in much more detail in my “mini book” the A B E of Economics.
Sorry Edward, I think I’ll pass on the book. Reading your analysis twice is enough for me.
Seriously, the first paragraph of the newer quotation is different, and greatly improved. Abe has talked about supply-side reforms but failed to deliver. Raising both taxes and government spending is not supply-side economics, last time I checked.
It was obvious from the beginning that Abenomics would both “succeed” and “fail.” It would succeed in the sense of pushing the Japanese economy closer to full employment, and in reducing the burden of the debt, relative to the non-Abenomics trajectory. I don’t think anyone can deny that it has achieved those two very limited objectives. And it was also always obvious that it would be likely to come up somewhat short of 2% inflation, that RGDP growth would remain very low, and that the debt situation would continue to be quite dire.
Japan is a country where the national debt is as high as Italy (higher in gross terms), where the workforce is falling at 1.2% per year, and where the government is unable to enact supply-side reforms due to special interest politics within his own party. That was always a scenario for “failure,” and no one should be surprised by the weak RGDP growth, or the fact that a 3% boost in sales taxes cut real wages.
Readers confused by Hugh’s relentless pessimism about Abenomics might have trouble deciphering the second paragraph in each quotation. So let me translate into easier to understand language:
“What makes people like me nervous is that Abenomics might be abandoned and the BOJ might return to the deflationary policies of the previous 20 years, causing an economic catastrophe in Japan.”
If that’s what he was trying to say then I wholeheartedly agree. I just wish he’d said it very clearly one time, instead of very obscurely twice. There’s a danger that some readers might think that the claim that Abenomics equals disaster implies that “not Abenomics” equals less disaster. That would be unfortunate given that not Abenomics equals a bigger disaster.
If you want to know what Japan is up against consider that Japanese RGDP has grown by 0.00% per year over the past 6 1/2 years. In contrast, Germany, the shining star of the European economy, has grown at 0.5% per year over the past 6 1/2 years. Then consider the fact that the Japanese workforce is falling at an accelerating rate, and unemployment is already at the lowest level in decades. How fast do you expect Japan to grow? Negative growth will be the norm; zero growth is the new “economic miracle.”