This
Monday, I took part in a one-hour panel discussion on China Radio
International entitled “Japan’s
Central Bank Reviving the Economy.” Some people have questioned
the wisdom of appearing on a Chinese state radio, but I've never been
censored or told what to say. (I've managed to say “Senkaku
Islands” twice in a 5-minute interview.) Until something like that
happens, I'll keep obliging them. The following is my crib sheet,
whose answers I'd whacked out the day before with a little help from
Jim Beams, then slightly revised the next morning. I changed my mind
on at least one point after a comment from Professor Robert Dekle—it
may be noticeable in the podcast—but I've left the memo as it was.
************
PART
1 (10:05-10:20)- Understanding Japan’s Economy
OVERVIEW
(Brief Opening Positions)
1
Do you generally support Japan’s hyper easing policy or are you
against it?
I
support it. The Japanese economy has been underperforming over most
of the last couple of decades, the chronic deflationary environment
is a major reason why, and there are enough experts convinced that
hyper-easing is at least a good place to start.
JAPAN’S
ECONOMY
2
How would you describe Japan’s economy today?
Chronic
underachievement. World class workforce, world class infrastructure,
and world class manufacturers somehow add up to economic
disappointment.
JAPAN’S
SLOWDOWN
3
What are main factors that have hurt Japan's economy for years?
The
failure to:
1)
1990s failure to deal with the consequences of the collapse of the
bubble economy.
2）
face down
vested interests in the policy-making process
3)
synchronize labor law and the social safety net
4)
optimize the utilization of women in the workforce. (This appears to
be an East Asian, not Japanese, failure.)
4
What is behind decades of deflation?
First,
interest rates have fallen globally since the 1990s. When is that
last time any state other than a few failed states had to worry about
hyperinflation? And it's been only a little over a dozen years since
a deflationary environment became the norm, not an exception. Beyond
that, though, Japan does suffers from a chronic consumption and
investment deficit, which appears to have created a self-perpetuating
deflationary environment. Abe, in his own way, is aware of that, and
is pushing an economic program to reverse this.
5
The classic description of Japan’s economy has been the aging
population slowing growth, is this really that hurtful? At the same
time as the population aged Japan also seemed to top out of
infrastructure projects and faced substantial competition from
regional powers South Korea and then eventually China, is Japan
really a victim to domestic aging or regional competition?
The
problem is the combination of a declining working-age population and
a rising elderly, non-working population. The Japanese economy has a
harder time raising productivity even as social expenditures grow.
Chinese
and South Korean competition has been painful for Japanese
construction firms, but Japanese engineering firms, for one, have
more than held their own against global competition, while the
manufacturing sectors are to a great extent mutually compatible and
reinforcing. Besides, the reliance of the Japanese economy on exports
has always been surprisingly low.
CAPITAL
INVESTMENT
6
Japan’s domestic investment has slowed substantially. Some say
this is because private companies have moved manufacturing and
capital intensive investment to other countries because of strict
environmental rules. How much has regulation pushed this investment
out of Japan?
I
believe that offshoring is mainly driven by cost considerations and
the need for presence in growing markets. Sometimes, local content
rules give manufacturers no choice. Regulatory costs certainly enter
into the equation, but they are not as big a factor as you might
imagine. Developing countries and emerging economies have quite
stringent environmental rules and regulations, and Japanese firms
established there follow them religiously, if only because they have
too much reputation at risk and too little political leverage to
avoid the consequences of violations.
7
The Japanese government has engaged in various capital intensive
infrastructure projects. Why have they failed to stimulate the
economy long term?
There
is reason to believe that a good portion of those infrastructure
projects turned out to be poor investments in terms of raising
productivity. To give an example: Work on Narita International
Airport languished for decades while the more convenient Haneda
Airport was kept out of the regular international flights market. The
result: Japan slips behind in the battle of the Asian hubs while it
is left with small, money-losing airports scattered all over Japan.
CURRENT
MONETARY POLICY
8
Japan's modern economy is built on incredibly low interest rates,
aggressive asset purchases by the central bank and the world's 2nd
largest national debt, how successful has this monetary policy been?
Interest
rates look much higher if you factor in deflation, and a negative
nominal interest rate is difficult to engineer. By comparison,
Chinese state enterprises and national flagship companies can borrow
under negative real interest rates. That's why Prime Minister Abe and
Governor Haruhiko Kuroda are taking aim at a 2% inflation target, and
replacing interest rates with the monetary base as the focus of
monetary policy. That means buying loads of Japanese Government Bonds
(JGBs).
9
Japan has been the classic example of a “liquidity trap” for
years, is the answer to that problem even more liquidity?
Kuroda
calls it quantitative and qualitative easing. The Bank of
Japan is attempting to generate inflationary expectations while
keeping long-term interest rates low by going long on maturity in its
JGB purchases. It's also increasing its exchange-traded fund and real
estate fund purchases. The hope, expectation, is that this generates
a virtuous cycle out of the liquidity trap.
PART
2 (10:20-10:32)- BOJ Plan
INDEPENDENCE
10
The new BOJ plan fits exactly with Shinzo Abe’s hyper easing
campaign promises. He also forced his way into choosing a new BOJ
governor. Is the BOJ losing its independence? Is that going to
undermine its impact on the economy?
Remember
that most governments have the right to choose their central bank
governors contingent on legislative consent. Once in place, those
governors enjoy great independence throughout their terms. Japan is
no different. And in terms of policy coherence at least, it is a good
thing to have the administration and the central bank sin broad
agreement on policy goals and the means to achieve them.
GOALS
OVERVIEW
11
Japanese central bank governor Haruhiko Kuroda is planning to inject
1.4 trillion US Dollars into the economy to spur inflation and revive
growth. What is he trying to achieve with this?
You
are referring to the doubling of the monetary monetary base, which is
part of the policy package designed to achieve a 2% inflation target
in two years' time while keeping interest rates low. The idea is that
low nominal long-term borrowing costs under inflationary expectations
will provide a pro-investment environment for businesses and
households.
12
What are risks involved in such kind of massive bond sales on the
government's debt?
The
perception that the BOJ is financing an ever-growing public debt
could touch off a massive JGB sell-off, the bond market collapses,
interest rates go through the roof, and hyperinflation ensues. This
is a low-probability scenario, but the Japanese government does have
to restore credibility in the long-term sustainability of the public
debt, or that scenario will gain more credibility, with serious
consequences all around. That's why the fiscal part of the Abenomics
package cannot begin and end with spend-spend-spend and the long-term
growth strategy must have real teeth.
$
SHOCK
AND AWE
13
This is twice the size of the US quantitative easing. Why is the
stimulus so radical this time? Did Japan need to shock the markets to
continue to push its currency down? Did the long build up to this
announcement require the BOJ to go bigger than it wanted to?
With
expectations already baked into the equity and currency markets,
Kuroda needed to do something dramatic and unexpected, at least at
this juncture so early into his regime. “Doubling down” seems to
be a good way to send a clear, if not quantitatively explainable
message. I also think that Kuroda wanted to signal a clear break with
the past with a Big Bang approach. Who knows what would have happened
if the BOJ had taken a more measured approach? I suspect that it
would have eventually wound up doing more cumulative easing to less
effect.
MONETARY
BASE
14
The governor of the BOJ says the plan will double the nation’s
monetary base to 3 trillion US Dollars by 2014, what does this mean?
Most
of the increase will come in the form of current deposits held by
banks in BOJ accounts. The expectation is that this, coupled with the
purchase of JGBs with longer maturities and other elements of the
policy package, will help boost investment.
15
The BOJ will be the only major central bank to target Monetary base,
how different is this type of target? Should banks be focusing their
goals on monetary base?
The
Japanese economy is unique in that it is in a chronic deflationary
environment. With interest rates effectively bottomed out at zero,
the BOJ appears to have no choice but to look to the monetary base
for policy guidance. At least that's how I see it.
INFLATION
TARGETS
16
Is setting a target to increase inflation healthy for a central bank?
Growth numbers driven by inflation can be misleading, is Japan
trying to pump up its numerical growth rather than real growth?
It
is healthy when you have chronic deflation, and inflation in the
vicinity of 2% looks like a reasonable premise for a functional
monetary policy. Real growth, of course, is the ultimate objective,
but the Japanese economy is underachieving, and chronic deflationary
expectations appear to be a significant cause of this.
17
Some analysts say Japan already has inflation. They say that looking
only at CPI is misleading, but if you look at credit on the market
there is already an overabundance of credit. Are these inflation
targets looking at credit or simply at CPI? With so much credit
inflation on the market already is there any guarantee that even more
would finally hit CPI?
There
is no “credit inflation” unless the price of goods and services
goes up, no? And that is exactly what the inflation target and the
policy package are intended to achieve. Yes, there is plenty of money
out there; it simply hasn't translated into rising prices. Let's hope
that Governor Kuroda's clear-cut, Big Bang approach works.
18
Some analysts say an aggressive inflation target like this only works
if you can convince people to buy ahead of prices rising, is that
really true? Is the potential inflation going to spur near term
buying?
The
idea is that inflationary expectations will spur buying, in terms of
investment and consumption. I am aware that the 2001-2006
quantitative easing did not achieve that kind of result. So there is
a risk that the issue will remain unresolved over the course of
Governor Kuroda's term, which would be a major problem for monetary
policy precisely because he has taken a Big Bang approach and has no
additional tools to call on.
19
If you don’t get this psychological/economic response are inflation
targets going to backfire on Japan?
Yes.
Everything goes back to square one, except the BOJ will have a lot of
JGBs on its hands. Worst case scenario (see 12) becomes more
plausible.
PART
3 (10:32-10:47)- Impacts
CURRENCY
IMPACTS
20
Is the new BOJ policy currency manipulation?
A
floating currency rates means that anything significant that happens
in the domestic economy directly affects the exchange rate. In that
sense, all governments are currency manipulators. If it were my
choice to make, I would have governments talk to each other about the
negative effects, real and potential, of exchange rate controls and
currency market interventions without using what is actually a US
legislative concept.
21
Tokyo is already under fire in the US, accused by some of currency
manipulation. Is Japan going to set off a currency war with this new
plan?
No.
As long as the Japanese government or the BOJ does not start buying
up foreign currency-denominated financial instruments, this will not
become a significant political problem.
22
Will other countries follow Japan by engaging in quantitative easing?
Or will the ones who can control their currencies more directly
artificially weaken their currencies?
The
US and Europe are already doing it, no? Countries like China exercise
more direct control on exchange rates, which has its own merits. But
exchange rate controls are a more brittle regime; the harder they
come, the harder they fall.
BANKS
23
Some are of the opinion that this will achieve its aims, helping to
boost consumer prices, drive up domestic demand and help spur growth.
But others say given the sluggish state of the Japanese economy, as
well as problems in Japan's key export markets, business and
consumers are not too keen to borrow money at this stage. In this
case, all this extra cash is likely to sit with the banks and not
flow to the real economy. So is there a risk that benefits will not
flow into the real economy?
If
the real economy fails to pick up, then yes, there is a risk. But the
global environment appears to be picking, if modestly. And the
Japanese economy is far less reliant, always has been, on exports
than, say, China and South Korea. Public sentiment has taken a turn
for the better, and the employment picture for new graduates has been
improving for the last two fiscal years.
24
Will banks begin to engage in “Currency Carry Trade” rather than
truly invest in the economy?
The
yen has already fallen significantly. I don't think that Japanese
banks are ready to go back to the zaitech of the nineties any time
too soon.
STOCK
MARKETS
25
It's not just the volume of new money that is significant; it is
where the new money will go. Kuroda is targeting long-term government
bonds and non-government assets such as ETFs - Exchange Traded Funds.
Buying ETFs is a way for the central bank to push money directly into
the stock market, supporting and increasing the value of assets. Will
the inclusion of ETFs simply push money into the stock market? The
US stock market has been booming yet the impact on jobs is
significantly less. Is Japan getting caught in the same trap of
focusing on the stock market rather than the real economy?
Not
very much. The amount of ETF purchases is relatively modest—the ETF
market is relatively small—and there are signs that rising stock
prices are already boosting luxury goods purchases. Anything that
raises consumption is useful in the current economic environment.
Rising stock prices also helps financial institutions and encourages
businesses to raise funds through the equity market.
NATIONAL
DEBT
26
At 230% of the GDP, Japan's public debt is already the highest among
industrialized nations. How will such stimulus move impact Japan's
national debt?
Keeping
interest rates down helps keep debt service down while rising GDP and
inflation increase tax revenue, don't they? This in turn diminishes
the need for deficit bond issues, or at least that's how the logic
goes.
27
Is japan actively trying to monetize its debt? Considering the large
amount of Japanese bond holders are Japanese, is this that
concerning?
No,
as long as the BOJ is conducting monetary policy of its own volition
and is not being forced by the government to buy those JGBs.
28
Some say in a worst case scenario, the government may not have enough
cash to make those payments and will be forced to sell additional
bonds to raise money. How bad would that be?
The
Japanese government already issues deficit bonds, which is
essentially “not having enough cash to make those payments and will
be forced to sell additional bonds to raise money.”
29
If the BOJ will be buying 70 percent of the bonds available monthly
with this program, wouldn’t that mean market appetite for bonds
would still remain? Wouldn’t that mean even if the government has
to issue extra bonds to roll over debt, they would have willing
customers?
Yes.
As long as financial institutions and institutional investors think
believe that the bond market will not collapse.
PART
4 (10:48-10:58)- Next Steps
FISCAL
POLICY
30
The Abe government has already announced aggressive fiscal spending.
How will this monetary easing policy interact with this new spending?
Is all of this too much stimulus?
The
LDP touted a 10 year, 200 trillion yen public investment program
coming in. I suspect that this is more bark than bite and will be
quietly scaled back as the overall Abenomics fiscal strategy comes
under closer scrutiny.
NEXT
STEPS
31
What should the BOJ do next?
Nothing,
except stay the course. Unless there is a significant change in the
economic circumstances. In poker terms, the BOJ went all-in. It's the
Big Bang approach. To change course now, even in a benign direction,
would seriously undermine credibility in the Kuroda regime.
32
What should the Abe Government do next to help the economy?
Two
things: a credible long-term plan to sustain fiscal credibility, and
a credible long-term growth strategy that overrides entrenched vested
interests. Prime Minister has three months to convince the Japanese
public, before the July upper house election.
33
If you were a business person in japan, how would you be reacting to
these actions?
I'm
not a businessman, never have been. But I can tell you that business
response has been generally favorable. That said, businesses reliant
on the domestic market and imported inputs are rightfully worried
about rising costs while they wait for the consumption tax hike to
kick in less than a year from now.
34
What should regional national competitors do in response to these
policies?
Maintain
a sense of proportion. Japan is an important part of the regional
economic environment, and the falling yen has a negative effect on
the Japanese import environment. But there's more to their export
environment than Japan, the yen will rise again if Abenomics works,
while inflation will eventually work against the competitivity of
Japanese products, and Japanese achievement of its full growth
potential surely benefits all regional economies.
OUTLOOK
35
Will Abenomics, a combination of big government spending as well as
an aggressive central bank asset buying program, work to push Japan
out of deflation and stimulate its growth?
My
answer to this kind of question is always the same: I'm an optimist;
I have to be, I live here. And then there's the third arrow in his
quiver: the long-term growth strategy.
36
Will Abenomics be harmful to regional economic cohesion?
A
strong Japanese economy is good for the regional economy. Remember,
Japan is a major customer of Chinese and South Korean goods and
services.
