New Year messages from Japan

Shinzo Abe

Only in Japan could the re-election of a party that has run the country for 53 of the last 57 years be greeted by global financial markets as a breath of fresh air.

But that is how the Liberal Democratic Party's landslide victory is being interpreted by global investors, if not Japanese voters themselves.

Everyone expects Shinzo Abe to spend yet more money the government doesn't have, and to pressure the Bank of Japan into spending trillions more as well - in a desperate bid to push up prices and finally reflate the economy.

There aren't many economists I speak to who think, with all of Japan's structural problems, that Mr Abe's two pronged stimulus programme will deliver lasting economic growth. But international investors do seem to think he will succeed in pushing down the value of Japan's currency.

Why does this matter for anyone outside Japan? It matters because it highlights three big themes for the global economy that I suspect we will keep coming back to in 2013. They are: central bank activism; competitive depreciation; and, for the umpteenth time, the great challenge of achieving decent growth in advanced economies laden with private and public debt.

Inflation pledge

I won't dwell on the central bank activism - I've said a lot on that subject in my last two posts. But it should be said that Mr Abe had put a rethink of national monetary policy front and centre of his election campaign, long long before it became a hot topic in the US and UK.

As well as proposing a lot more old-style deficit spending on public works and the like, the soon-to-be Japanese prime minister campaigned on a pledge to raise the Bank of Japan's inflation target to from 1% to 2%, insisting there should be unlimited monetary stimulus until that target is reached.

If that sounds odd to you, remember that Japan is a country which has had falling prices, of and on, for years. Consumer prices fell almost continuously between 2009 and 2011, and most forecasters expect the inflation rate to be negative in 2013 as well.

The idea behind this, roughly similar to the Carney argument for a nominal GDP target, is that the only way to stimulate activity, in a deeply deflationary environment is to convince people and businesses that you really will spend whatever it takes to ensure that prices and nominal demand will be higher next year than they are today. So, in theory, businesses and individuals will finally decide to spend and invest.

Mr Abe threatened to revoke the central bank's independence, if necessary, to achieve all this. But he might not have to, given that the current Governor, Masaaki Shirakawa, finishes his current term in April, and his two deputy governors are up for renewal as well.

One front-runner to replace Mr Shirakawa is Kazumasa Iwata, the president of a respected economic think tank who has talked previously about setting up a 50tn ($596bn; £368bn) fund to buy foreign government bonds in a bid to force down the value of the yen.

We know central banks can debauch their own currencies on the exchange markets, even if the depressed state of the domestic economy makes them unable to reliably produce inflation or decent economic growth at home. But we also know that such a strategy is not necessarily going to do down well with the rest of the world at a time when many other countries are dealing with the same problem.

Currency battles

That brings me to the second theme for 2013: which is competitive depreciation.

We talked a lot about "global currency wars" in 2010". If things don't go well for the global economy in the first half of next year, I suspect we could hear about it again in 2013.

If you look at the growth strategy of nearly every major economic region next year (with the partial exception of the US), it relies more than ever on the support of exports.

Put it another way, many countries are once again hoping to borrow from other nations the demand they cannot generate at home. We know, by the laws of arithmetic, that at least some of them are likely to be disappointed.

Which brings us to the third theme from this election in Japan - unfortunately the same one that Japan has been teaching us (if we bothered to pay attention) since the 1990s. That painfully obvious but important lesson is that growing your way out of the debt-ridden aftermath of a financial crisis is really, really hard. And when political elites cannot deliver deep-seated structural reforms, it is more of less impossible.

The stock market rose by nearly 2% on the election result, but as Carl Weinberg of High Frequency Economics points out, Japanese stocks are still at barely 20% of the level they were at in 1989. Industrial output and employment are back to where they were 22 years ago. And the stock of public debt stands at 230% of GDP.

The rest of the world has tolerated Japan's efforts to push down its exchange rate in past years, out of sympathy for its exceptionally sorry plight. But the more their own situation starts to resemble Japan's, the less sympathetic its Western trading partners may become.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 26.

    22 But what has this got to do with Japan? Its probs have little to do with natural resources & more to do with the uncompetitive nature of its economy. It has found it hard to change & adapt; its labour mkts are rigid, its business are not competitive etc.

  • rate this

    Comment number 25.

    23TP. With over 4 billion working age people in the world it is not possible for anywhere near everyone to have non-pointless jobs. The specialisation we have in our modern economy is only supported because we have cheap energy and use it to mass produce and distribute cheap food. Forever growing the economic pie when basic costs go up is not possible hence real per capita economic growth is over.

  • rate this

    Comment number 24.

    Japans Deficit as a % of GDP decreased significantly from 2004 to 2007 (inclusive) having peaked in 2002/03, from 2000 to 2007 it had reasonable & increasing growth, badly hit by the crisis & natural disasters, its had a bad time debtwise (tho its debt level was also very high before) & erratic growth since 2007. Japans modern economic history is not a simple story though many try to claim it is

  • rate this

    Comment number 23.

    "Japanese rate is just above half that of the UK (4.1%) so arguably for the majority of its people it is a successful economy "

    Yes and you only have to go to Japan to see the number of people doing pointless jobs. Bit like the Department for Business, Enterprise & Regulatory Reform and the Department for Innovation, Universities & Skills but on a national scale.

  • rate this

    Comment number 22.

    20 TP. I'm talking about the mathematical impossibility of exponential growth in a finite world. You can grow the top line GDP number indefinitely only if you have inflation that wipes it out in real terms. Unless we can substitute better energy and other resources for what we have used up we can no longer grow indefinitely. One can't break the laws of physics (a true science unlike economics)

  • rate this

    Comment number 21.

    Again no mention of unemployment in an article supposedly about economics. The Japanese rate is just above half that of the UK (4.1%) so arguably for the majority of its people it is a successful economy but clearly the level of debt is a significant qualification. By the same token baring major immigration there is a limit on its capacity for growth and therefore on the speed of debt reduction.

  • rate this

    Comment number 20.

    19 Your post makes absolutely no sense whatsoever. What are you talking about?

  • rate this

    Comment number 19.

    The availability of cheap resources is not there to enable growth without at least equal or greater inflation in the OECD. Now developing economies can manage growth > inflation but by 2020 they too will be in the same predicament. Some things can not be substituted as efficiently as what they are replacing. Our sources of energy are a key exapmle of this as we have used all the low hanging fruit

  • rate this

    Comment number 18.

    Japan spent a huge amount trying to reflate it's economy with colossal infrastructure projects. One can't know what would have happened if they had not done this but by any standards the impact was modest. Now they have a crippling debt and awful problems. It's a warning to those that misunderstand Keynes' suggestion of government spending to boost a flagging economy. He did not promote deficits.

  • rate this

    Comment number 17.

    Japan has been in more or less the same position for years, the policies haven't been constant, various approaches have been tried with varying degrees of success & failure with a knack for giving up on those showing signs of success too soon & soldering on for ages with the others (e.g QE) Studying Japan shows also most of the "economic realities" told to us by our own government are simply wrong

  • rate this

    Comment number 16.

    a male economy
    only can a woman safe
    guard the future

    (haiku from the 2012}

  • rate this

    Comment number 15.

    Japan's govt since early 1990s spent vast sums on infrastructure incl hugely expensive shinkansen network (Tokyo to Sapporo under Tsugaru Str - amazing). This was classic Keynesian response to collapse of econ activity. It has not worked with govt debt to GDP running at 220%. A lesson for those who propose similar here. Its probs lie in failure to reform (labour mkts, competition policy etc)

  • rate this

    Comment number 14.

    Japan has LOST 20 years.

    Why? - because it adopted policies that prevent capitalism from working.

    Our idiots (BoE/Treasury) are repeating the same policy errors. Propping up bankrupt inefficient zero return on investment business and banks - just like they have done in Japan for 20 years.

    Zombies MUST die! Be they Japanese or British.

    Debt and asset prices must be deflated (see #13)

  • rate this

    Comment number 13.

    Japan & Zombie companies - Why the Liberal party will fail.

    I heard some plonker suggest that because Japanese companies survived a 20 year depression they must be strong - this is complete nonsense.

    The vast majority of Japanese companies are Zombies - they have survived (when they should not have) because they got almost free money for 20 years & have made no return on investment.

    xRP's blog

  • rate this

    Comment number 12.

    The race to the bottom cannot continue.

    It is based on the short-termism of goverments and CBs.

    It is ridiculous that they want to manipulate the markets and do not allow for correction to take place. I thought that we learned the lessons from the eastern bloc so I am very concerned that we are heading (see Carney/Fed/BoJ) to economies supported by money-printing!

    Time for some Hayek please!

  • rate this

    Comment number 11.

    Countries in surplus should simply have a negative interest rate, countries in deficit should have a positive interest rate.

    This will fix the imbalances.

    Countries with surpluses, which deflate their currency will only make matters worse.

    Still estimate the crash will come in 2015. Just can't get to hang of printing to infinity.

  • rate this

    Comment number 10.

    Political corruption. No backbone. An inability to reign in the criminal behaviour of corporations and the super rich.

    No change yet. What does it take?

  • rate this

    Comment number 9.

    What's good for Japan id 'good' for the UK as we copy them lock stock and barrell

  • rate this

    Comment number 8.

    Changing Government in Japan will make no difference (just as UK) as the policies of the different parties are the same!
    Corporate greed and corruption in Japan is endemic (see Olympus).
    The Yen became too strong because of speculators and the carry trade (USA hedge funds).

  • rate this

    Comment number 7.

    govts have the only spending accounts with central banks
    QE shows central banks can spend any money
    their power comes from govt power
    all those monarchs and emperors faces marking their
    obligation and power
    central banks now return the interest on the bonds they buy
    1973 $ also renouncing claim on gold
    time to accept monetary reality
    remove unnecessary hurdles
    govts do not need to issue bonds


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