Japan’s Three Arrows―Will They Fly?

IMF Blog, August 5, 2013

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Bibliographic details

• Authors: Jerry Schiff
• Published: August 5, 2013

Overview

• Author: Jerry Schiff
• Date: August 5, 2013
• Topic: Assessment of Prime Minister Shinzo Abe’s economic plan (“Abenomics”), focused on its three components—aggressive monetary easing, flexible fiscal policy, and structural reforms—and the prospects for escaping deflation and raising sustained growth.

Abenomics: Changing Minds

• Objective: "An escape from deflation triggered by monetary easing and fiscal stimulus would lower real interest rates and stimulate investment, consumption and—with, at least temporarily, a weaker yen—exports."
• Mechanism: Structural reforms are intended to "contribute to confidence and ensure that higher growth is sustained."
• Required shift: "A leap from a low-growth deflationary equilibrium to a new equilibrium characterized by positive inflation and higher sustained growth" requires "a parallel shift toward more risk-taking" and changes in expectations by businesses, consumers and financial institutions.
• Contextual fact: "A Japanese college student today has experienced deflation and low growth through her entire life, with nominal GDP at the same level as 1991."

An End to Incrementalism?

• Monetary policy action: In early April, the first arrow was fired with the Bank of Japan’s new quantitative and qualitative monetary easing (QQME) framework to achieve 2 percent inflation "in a stable manner within about two years."
• Characteristics of QQME: "The sheer size of the planned asset purchases marks a clear departure from the incremental approach of the past, and forward guidance is aimed squarely at sending the message that QQME will continue for as long as necessary to achieve its goals."
• Limits of monetary policy: "Monetary policy cannot do the job alone--all three of Abe's arrows are required."
• Structural reform priorities (policy recommendations implied in the text):
  • "Concrete steps to raise employment"
  • "Increase labor market flexibility"
  • "Deregulate agriculture and the services sector"
  • "Enhance the role of the financial sector in supporting growth"
• Fiscal policy and debt concerns:
  • Net public debt has increased "from 13 percent in 1990 to 134 percent today, the highest among advanced economies."
  • Need for "a clear and convincing plan to reverse the long-term trend of rising government debt."
  • Recommendation: "Moving forward, as planned, with the consumption tax hike next April would be a major step in the right direction."
• Political timing: With the Upper House election complete, "all eyes will be on Tokyo to see whether the structural elements of Abenomics will also represent a decisive break from the past."

Is it Working?

• Early encouraging signs:
  • "Growth in the first quarter rose by an impressive 4¼ percent (seasonally adjusted annual rate)."
  • "Equity markets are up by some 40 percent for the year."
  • "Exports appear to be recovering."
  • "Credit growth has turned positive."
  • "Consumer and business confidence have picked up."
  • "Inflation expectations are beginning to rise."
• Anecdotal evidence: Media reports of increased consumer demand—example: "purchases of expensive tuna are now outstripping the more humble mackerel in sushi restaurants throughout Tokyo."
• Remaining gaps and risks:
  • "Higher investment and wages—two keys for ultimate success—are not yet observed."
  • Businesses need assurance that "the economy is moving to higher growth" before increasing investment and wages.
  • Financial institutions are "still sorting out the implications of recent changes for their business models," contributing to market volatility.
  • External risk: "The global economy has been volatile and a downturn could create headwinds just as Japan's economy is taking off."
  • Domestic risk: The bigger risk is that "through complacency or political obstacles we get a partial version of Abenomics, missing one or more of its key elements and failing to convince that 'this time is different.'"
• Overall judgment: "We think it can be [an economic triumph], and initial signs are positive. But such success is not assured. It will require difficult decisions as the country moves into largely uncharted territory."

Source: Japan’s Three Arrows―Will They Fly? — Jerry Schiff, August 5, 2013

Content in this bundle

• iMFdirect博客: 日本的新政“三箭”能否顺利中的？2013年8月5日
  • iMFdirect博客: 日本的新政“三箭”能否顺利中的？2013年8月5日 (Markdown version)
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