Friday, March 15, 2013

Abenomics—the MOST interesting economic experiment going

Whenever Japan's new expansionary monetary policies are discussed online, some clown will inevitably write that Zimbabwe tried this and the result was runaway inflation.  Well Japan is NOT Zimbabwe.  Progressive monetary theory postulates that while the value of money is determined in part by value of the natural resources and energy an economy can access, the BIG determinant of value is what the society does with those resources.  Since Japan has never had many natural resources, she has long concentrated on the what-do-you-do-with-those resources part of the equation—to the point where she is perhaps the best in the world at these things.  In order to meaningfully compare Japan and Zimbabwe economically, you must imagine Zimbabwe building a Lexus.

Because the Japanese have so many world-class industrial skills, an expansionary monetary policy will be like taking a kink out of the oxygen hose.  This solution has been so obvious for so long, one wonders why they have not tried it earlier.  I actually have no idea but I would imagine the answer is some sort of peer pressure.  The central bankers of the world tend to believe many of the same things and for at least a generation, they have believed a country's industrial sector is just another economic resource to exploit.  This is a terrible idea in any country—but it really stinks up the joint in Japan where her very survival depends on industrial excellence.  A lot of good things have happened to the Japanese economy because they were willing to learn from outside—this was NOT one of those times.  Even so, it takes a lot of intellectual courage to tell the rest of the world's central bankers they are wrong.

But now they have done it.  Japan has appointed three new BoJ Governors who seem to quite passionately believe that the rest of the world's central bankers ARE wrong.  They are going to change directions.  Marriner Eccles has gone to Washington Tokyo.

But here is what I find so amazing.  Japan is going to do VERY well with her new monetary policy.  She will attract imitators.  But they will not do so well.  Why?  When you print a lot of money, the outcome can easily BE inflationary.  The only time it isn't is when the money is used to finance necessary internal improvements.  You expand the money supply—you expand the wealth of your nation. Now Japan can do this.  Lots of countries cannot.

When Toyota decided to re-invent the idea of quality control, she didn't keep her methods secret.  Your local library can probably get their hands on 25 good books on how Toyota did it.  And yet, year after year, the ratings of build quality are published and some Toyota product will be on top—usually a Lexus.  Turns out while methods are important, it helps if you believe they will work.  Japan is almost certain to pull off this economic turnaround—she has too many strengths not to.  But we must be careful to learn the right lessons from their experiment and remember, they can build a sustainable society that runs as smoothly as a Lexus mostly because they already know how to build a Lexus.  This is a country that simply must play to its strengths—something that usually happens or how did they become strengths in the first place?

Everything You Need To Know About 'Abenomics' — The Japanese Economic Experiment That's Captivating The World

Matthew Boesler | Mar. 14, 2013

There's a new government in Japan, and it appears determined to finally do "whatever it takes" to attempt to revive the moribund Japanese economy, which has struggled with deflation for a decade.

The plan – called "Abenomics," named after newly-elected Prime Minister Shinzō Abe – is three-fold. It involves a massive increase in fiscal stimulus through government spending, a massive increase in monetary stimulus through unconventional central bank policy, and a reform program aimed at making structural improvements to the Japanese economy.

In short, "Abenomics" amounts to one of the biggest economics experiments the modern world has ever seen.

Financial markets are loving it. The Japanese stock market is soaring. But what exactly is it, and how is it expected to work?

In a recent report, titled "Abenomics Handbook," Nomura economists led by Tomo Kinoshita break down the Japanese government's new plan and examine the challenges facing it.

Naturally, the first question is: How exactly are these policies supposed to boost the economy?

While fiscal stimulus and structural reform are essential components of the experiment, monetary policy is expected to do most of the heavy lifting in the short term. So, let's take a look at the monetary policy behind the plan first.

The monetary policy aspect of Abenomics

The goal of easy monetary policy is to reduce real interest rates. In Japan's case, it has a significant side effect of weakening the yen.

So, the yen is weakening – and it's beginning its journey downward from incredibly elevated levels. (In recent years, investors piled into yen as a safe-haven currency, helping to drive up its value.)

A weaker yen could be virtuous for the Japanese economy. The currency has already devalued swiftly against the dollar since September, when the wheels of a new economic regime in Japan were set in motion.

This does a number of things. Most importantly, it boosts exports, because other currencies can now buy more Japanese-manufactured products. That means manufacturers are selling more, which feeds into corporate earnings and hopefully translates to increased business investment.

All of this should boost stock prices on a fundamental basis. At the same time, the weakening yen provides fuel for stocks. Since September, the Japanese government has verbally "talked down" the yen, and a big rally in the Nikkei materialized along with the decline of the currency.

"As for the specific effect of higher share prices on the economy," the Nomura team writes, "we think higher share prices invigorate corporate capex by (1) making it easier for companies to raise funds, and (2) making companies more likely to invest in business expansion. We estimate that a 10 percent rise in share prices boosts capex by 3.2 percentage points one year later."

And the wealth effect is a big part of the plan.

"For households, we think higher share prices stimulate willingness to spend by boosting the value of shareholdings and giving an indication of the health of the economy," the Nomura economists continue. "We estimate that a 10 percent rise in share prices boosts consumer spending by 0.12 percentage points three months later."

All of this works to narrow the ¥16.5 trillion (~ $170 billion) gap between current GDP and potential GDP, thus working toward eliminating deflationary pressures.

However, the Japanese government has come under fire in the international community recently for its verbal interventions in the yen that have caused it to swiftly devalue against other currencies.

The Bank of Japan has a few other options.

Recently, it announced that it would double its target inflation rate to 2 percent, employing open-ended asset purchases (much like the Federal Reserve is doing in the United States) to get there.

This represents a shift from the conservatism that has characterized the Bank of Japan in recent years. Haruhiko Kuroda, a big dove on monetary policy (meaning he's usually in favor of more stimulus, not less), is set to take over at the helm of the central bank in April. The times are changing, and one can expect to see some experimentation in the months and years ahead.

(Click here for 23 things the Bank of Japan could do to weaken the yen even more.)

The Abenomics approach to fiscal policy

The second part of the "Abenomics" game plan involves short-term fiscal stimulus. This aims to revive economic growth immediately through increased government consumption and public works investment.

Abe already introduced ¥5.3 trillion (~ $60 billion) in public works spending as part of its 2013 budget. That's up from an estimated ¥5 trillion (~ $50 billion) last year, according to Nomura, representing a change from the fiscal tightening that Japan has undergone in recent years.

"Aside from the general account, the government plans to set aside spending for post-quake reconstruction efforts in special accounts," says Nomura. "The Abe government has decided to boost total spending on the five-year effort (through FY15) to about ¥25 trillion (~ $260 billion), from ¥19 trillion (~ $200 billion) previously."

The important point here is that the government is pledging to be flexible with regard to fiscal policy in the coming years, a stance in stark contrast to those in the United States (which is dealing with the effects of sequestration) and the euro area (where economic austerity is helping to deepen the economic contraction there).

Structural reforms – the most important aspect of Abenomics

Loose fiscal and monetary policy is supposed to facilitate expansionary economic conditions in the short term (although weakening the yen is arguably a longer-term goal as well).

Crucially, though, the success of "Abenomics" hinges on the third prong of the approach: structural reform.

The Nomura economists call this "the key to improving medium-term growth potential," details of which are expected to be unveiled to the public in June.

"With government debt having expanded to more than 200 percent of GDP, we think it will be difficult for Japan to boost the economy in the medium term via fiscal spending alone," they write. "As the effects of bold monetary easing are primarily transmitted via expectations on the financial and capital markets, any resultant move out of deflation is likely to be short lived unless economic growth can also be boosted via the government's growth strategy."

Below is a summary of the growth strategy currently under proposal. (click to enlarge)

There are several aspects to the regulatory reforms under proposal as well, outlined below.

In short, there is a lot of work to do.

Will the Abe government be able to get it all done? There are some serious open questions about its ability to achieve success in putting the Japanese economy back on stronger footing.

The rest of the world will be watching closely. more
They are doing it.  New bankers who believe they exist to serve the rest of the nation.  How refreshing.

Japan Confirms Three Doves To Run The Bank Of Japan

Peter Brieger, Agence France Presse | 14 MAR 13

Japan's parliament on Friday approved a new central bank management team that is widely expected to support the government's demands for more action to stoke the world's third-biggest economy.

The upper house gave the green light to Haruhiko Kuroda as Bank of Japan governor, with the finance veteran and long-time BoJ critic seen as likely to launch aggressive monetary easing measures, after his predecessor drew heavy criticism for failing to turn around Japan's fortunes.

Lawmakers also approved the nominations of Kikuo Iwata and Hiroshi Nakaso as Kuroda's deputies, with all three clearing the vote hurdle with comfortable margins.

Japan's leading opposition party had warned it would vote against Iwata -- a strong supporter of monetary easing and of giving Tokyo more control over the independent BoJ -- but his nomination passed by a count of 124 votes in favour with 96 votes against.

The BoJ's new management team, which was approved by the lower house on Thursday, is expected to take up their positions next week. more

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