Sunday, January 20, 2013

Abenomics Metacritique

Prime Minister Abe’s economic policy consists of three parts, 1) an inflationary monetary policy (inflation target, etc.), 2) an expansionary fiscal policy (public works, etc.), and 3) a growth strategy (industrial policy broadly defined). Accordingly, criticism is leveled at each of these components.

There are accredited economists criticizing 1), as can be discerned from his book-long diatribe against the Bank of Japan. And I’ll leave that issue for accredited economists since my economics literacy is about the level of the Japanese literacy of a gaijin who can barely make out hirakana. But I do know that “currency war” talk is actually boilerplate language coming from central bankers when policies cause sudden exchange rate shifts. But there’s no way of isolating floating exchange rates from monetary policy. I notice that no one has been worrying about the US QE1~3 and what the bank of England has been doing about its own money supply since the financial crisis broke out in 2007. Christine Lagarde at IMF has actually called the Japanese inflation target a “good and interesting project.” “Currency manipulation,” my foot, Matt Blunt and the American Automotive Policy Council.

Would I then, give Abenomics 1) a ten out of ten? Of course not. And neither does Lagarde, whose endorsement comes with the caveat “if associated with clear independence of the central bank.” Note also that cries of currency manipulation will grow louder, more widespread, and more convincing if the Japanese government actually begins buying non-yen financial exchange assets. Expect the Abe administration to abandon the idea of changing BOJ’s charter law (not that it still needs an amendment, now that BOJ has accepted the notion of an inflation target and a government-BOJ policy “accord”) and to refrain, as will BOJ, from purchasing non-yen financial assets with its intervening in the currency market.

How about Abenomics 2)? There are two lines of criticisms here. The first is that the Japanese economy does not need a short-term, Keynesian tide-over fiscal package at this point. I’ll leave that been-there, done-that/two lost decades debate to the economists, but the Abe administration must be happy that Professor Hamada will remain for the most part in New Haven, Connecticut, given his skepticism towards a fiscal stimulus. The other criticism is that it’s full of pork. Now some items, such as the 2.4582 trillion yen to fill the projected FY2012 revenue shortfall in the public pension system*, are easily justified, and the 268 billion yen outlay for renovating schools against earthquakes, come across as an example of accelerating multiyear outlays, standard practice in any stimulus package, which takes the issue back to the first criticism. In a different vein, the effect of the extra 290.6 billion yen in direct cash transfers to cover the local government copayments under the stimulus package is also obvious enough that make it easy to lay political interpretations on it one way or other, or both. The problem from my perspective is that there is nowhere near enough information on this MOF page to figure out what most of the 13.1054 trillion is being spent on, and when and how, to enforce any kind of accountability on the government regarding the stimulus package. I’m sure that more information is available on the individual ministry websites, but reporters working under time constraints have not been going to the trouble of collating them (nor I unless someone offers to pay me for the trouble). This leaves questions about pork unanswered except for the odd item that pops up in the media—say, retrofitting whale “research” vessels with earthquake recovery money—and stirs up public concern. This is not a healthy state of affairs for meaningful public discourse. Shouldn’t reporters covering the economic beat demand more?

As for 3), some of the criticism is unfair, simply because, in my view, the policymaking process hasn’t reached the point where substantive criticism becomes possible. Given the dithering around the TPP negotiations, though, healthy skepticism is warranted, one that Professor Hamada also appeared to hint at in his FCCJ talk.

* The government will be replacing what is essentially scrip—the Japanese equivalent of the trillion-dollar platinum coin—with conventional deficit JGBs.

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