Japan—here we go

The news out of Japan is not surprising to anyone remotely interested in the economics of development.  Just remember, the great outburst of development economics here in USA was most embraced (some say invented) by those closest to the frontiers where folks were attempting to turn virgin soils into farms and towns.  The only state bank is in North Dakota.  The People's Party was formed in Omaha.  Thorstein Veblen grew up in Minnesota the son of an actual pioneer.  Our people have been thinking about the economics of development since at least 1873 so we have a pretty clear-eyed view of what works under adverse conditions.  And since Abenomics is a more or less an A+ incarnation of everything we believe about how societies grow and prosper, it's not surprising it's beginning to succeed.  We are usually right about these things.

Of course, just because Abenomics is off to a rollicking start does not mean it will be a long-term success.  The most important factor will be just how long the Japanese are willing to stick to their expansionary plans.  Here in USA, we have a perfect cautionary take.  FDR began his Keynesian expansion in 1933 but lost his nerve in 1937 when he started listening to the budget-balancing devils in his head.  It only took a few months before the nasty Depression had returned and would continue until USA started gearing up its war machine in advance of its entry into WW II (1941).  Only when FDR became consumed with war fever did his government approve of a Keynesian stimulus large enough finally end the Great Depression.

What is especially interesting about the following article from Business Insider is that it relies on what in the old days was that most trusted of economic indicators—machine tool orders.  I am certain Tony would approve—I know I do.

Some New Data Out Of Japan Is Just Awesome

Joe Weisenthal | May 16, 2013

Abenomics, it's working!

(For those who still don't know what Abenomics is, it's the new shock stimulus from new Prime Minister Shinzo Abe, who is using fiscal and ultra-aggressive monetary policy to juice the economy).

So far that's had a remarkable effect on financial markets. The yen has been falling hard, the Nikkei is easily the hottest stock market in the world.

And now the economy seems to really be coming to life.

Check out this awesome growth in machine tools, a key part of the Japanese manufacturing story.

#Japan March Core Machinery Orders +14.2% One Month; Expected +2.5%

That's just one datapoint, though yesterday there was GDP, which came in at an annualized growth rate 3.5%, faster than folks expected. more

 Here is the view from Germany (DW).

'Abenomics' fuel Japanese economic growth

uhe/dr (AFP, Reuters) DW.DE 16.05.2013

Japan's economy has expanded rapidly in the first quarter, boosted by growing exports and higher consumer spending. Prime Minister Shinzo Abe's huge fiscal stimulus, known as Abenomics, seems to be working.

Japan's gross domestic product (GDP) rose 0.9 percent between January and March, supporting economic recovery from six months of contraction in 2012, official data released by the Cabinet Office on Thursday showed.

As the first-quarter gain beat analysts' expectations for a 0.7 percent rise, Economics Minister Akira Amari described the growth figure as a good start into 2013.

Cabinet Office data showed that substantial growth in Japanese exports, caused by a weaker yen, boosted the GDP figure. In addition, private consumption rose 0.9 percent on the back of a Japanese stock market rally in recent months and expectations for higher salaries.

Japan's stocks have surged 70 percent since November 2012, while the national currency devalued 30 percent against the euro.

Japanese monetary policy seeks weaker Yen

This was the result of the pro-growth economic policy of Prime Minister Shinzo Abe, who pressed Japan's central bank into aggressive monetary easing while he increased government spending.

Dubbed "Abenomics" the policy aims to overcome years of deflation in Japan, which crimped private spending and business investment. Abe hopes to spur economic growth with higher inflation of at least 2 percent within the next two years.

Capital spending by Japanese firms in the first quarter decreased by 0.7 percent, however, highlighting that the boom has not yet fed through to the real economy. Moreover, Japan's trade deficit more than quadrupled to 362 billion yen (2.7 billion euros) compared with the same period in 2012, as the weak Yen made foreign goods more expensive. more

And a reminder that established economic opinion in Germany is still neoliberal.  They are very skeptical of Abenomics.  Educated Germans tend to grow attached to schools of thought and Abenomics is outside their schools.  Note how the following story opens with a subtle dig at the nationalist elements of Japan's economic experiment—two generations of Germans have been taught that nationalism leads to bad outcomes so this is an announcement that even the good news out of Japan must be treated with suspicion.

On the other hand, Japan is one of those cultures the Germans take seriously.  Just remember, in the heyday of Leica and Zeiss, German cameras were the best on the world.  (This factoid is for the amazement of those born after about 1960 who cannot imagine the world of cameras without the Japanese.)

A strong economy, a strong Japan

DW.DE 17.05.2013

Prime Minister Shinzo Abe is reforming Japan’s economy. Strong growth for this quarter has corroborated his “Abenomics” strategy, which also has nationalistic motives.

Until recently Abenomics, Japan's new economic strategy, was considered in the West as an attempt on the part of Tokyo to conduct a currency war. However, now the world is amazed by the success of this idiosyncratic path out of Japan's ongoing crisis.

In the quarter to March, Japan's gross domestic product rose by 0.9 percent in real terms in comparison to the previous quarter. With an annual rate of 3.5 percent, Japan is doing better than other G7 nations.

The upward trend is being attributed to a weaker yen and the higher stocks, which are both consequences of the new prime minister's strategy of hyper-easy monetary policy and high government spending. The yen has lost a fifth of its value since the beginning of January and stocks have surged. Export companies' profits have also grown considerably as a result.

Abe told Obama Japan had to remain strong

More exports and consumption

The upturn at the beginning of the year was partly created by exports which rose by 3.8 percent. However, this figure does not fit with the rather patchy monthly export figures. Japan will also have profited from the devaluation of the yen as well as the economic recovery in China and the US. Moreover, Japanese consumers increased their spending between January and March by 0.9 percent by comparison with the previous quarter.

Analysts attribute this to the first results of the asset price effect - capital gains and currency gains in foreign and Japanese shares and bonds are sometimes invested into luxury items. The employees of export firms received higher bonuses this year and these seem to have flowed into consumption. This also explains why consumer confidence has grown to a pre-crisis level.

Three Arrow reforms

Abe's strategy wants to bring an end to deflation and revive the economy with "three arrows" - fiscal stimulus, hyper-easy monetary policy and structural reforms.

In January, his government unveiled a stimulus plan worth 10.3 trillion yen (78 billion euros). Abe said the measures were intended to spur a 2 percentage point rise in real economic growth and create some 600,000 jobs.

Japanese exports rose in the first quarter of this year

Japan's government debt was at 230 percent of its gross domestic product, the worst among the industrialized nations, at the end of 2012.

At the beginning of April, the Bank of Japan announced it was entering a new phase of monetary easing in terms of "quantity and quality."

The central bank's new governor Haruhiko Kuroda plans to double its monetary basis within two years and to create an inflation rate of 2 percent by 2015. By buying up government bonds and other assets, the central bank is pumping 1.1 trillion euros into the economy thus helping long-term inflation rates to decrease and allowing companies and private individuals to take out lower loans.

More than a flash-in-the-pan strategy

At first glance, this strategy could be seen as a flash-in-the-pan because the devaluation of the yen and the increase of state expenditure has its limits. However, the critics of Abenomics should not underestimate Japan's strong will to pull itself up by its own bootstraps.

For the first time since the real estate bubble burst 23 years ago, Japan's elites seem to have reached a consensus - a strong economy will help strengthen Japan in face of China's strivings towards hegemony.

Consumer spending rose in Tokyo and other cities

The conservative new head of state said Japan had to remain strong when he visited the US earlier this year, first in economic terms, then in defense terms.

For this, the deflation has to fall and the strong currency has to be devalued. Secondly, the economy has to grow by 2.5 percent in this fiscal year so that VAT can be increased in April 2014. Japan will only be able to rein in its debts and protect this Achilles heel with higher tax revenues.

Skeptical companies

However, Japan's new "now or never" policy is not without its risks. The worst-case scenario would be capital flight and debt collapse, although this are both a long way off still. Abe has to convince Japanese companies that the yen will remain weak and the upturn will continue. Otherwise, companies that are lowering their investments and do not dare increase salaries could be the reason for the failure of Abenomics.

The prime minister's third arrow is to improve conditions for companies. The first step was free trade with the EU and neighboring countries in the Pacific. Better childcare so more women can work is the second. And thirdly, there will be a massive investment in technical innovations. He's putting forward a whole package of structural reforms in June. more