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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  • Comment number 66.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 65.

    "known for right-wing nationalism "

    Why is nationalism "right wing"? Most aggressive nationalists are often the left; see Soviet Russia, China under Moa and not forgetting the Nazis (who aggresively tied nationalism to socialism). There movements were responsibly for fairly large chunk of misery of 20th century.

  • rate this

    Comment number 64.

    Obama has purposely encouraged Japan's militarist tendencies = part of aggressive US drive to undermine China’s influence in Asia Pacific. Japan's turn to nationalism & militarism is a product of country’s deepening economic/political crisis. Japan’s trade surplus has turned to deficit. After 2 decades of economic stagnation, economy is again in recession.

  • Comment number 63.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 62.

    LDP leader Shinzo Abe - known for right-wing nationalism - has focussed on defence of all Japan’s "claimed" territories. Why?
    To attain constitutional change trainsforming “Self Defence Forces” into regular force able to participate in “collective self-defence”. PACIFIST clause has impeded Japan's participation in US-led wars of aggression in Middle East...

  • rate this

    Comment number 61.


    Sorry, but UNLESS there is an economic rebalancing things will only stay as they are, and progressively get worse.

    I am right!

    And capitalism will achieve this in the end. People like you who resist the inevitable are determined to turn the UK in Japan - WHAT DO YOU THINK WE WILL GAIN?

    How many children do you want to throw on the scrapheap by keeping a few bankers in luxury?

  • rate this

    Comment number 60.

    Ditch rhe dull property diatribes, John, it is a broken record.
    Last thing anyone needs is a property price-crash, we had one already and now need a boom to get back to normality.
    Ditto interest rate rises, which would be another calamity.
    Doesn't matter how often you blog, you are still wrong.
    No hard feelings though, Happy Xmas!

  • rate this

    Comment number 59.

    Sorry fellow bloggers, but cut out the green palaver, it is boring, passe and off-topic.

  • rate this

    Comment number 58.

    56.Geoff Berry

    Both Japan and the UK have seen escalation of property prices to levels at which it is impossible for the property to be economically utilised. It is maintained at these prices by idiot regulators and so prevents capitalism restarting.

    I agree about the two speeds - remote Japan suffers too!.

    You forget Hendon (Sunderland) and are as London centric as the rest of us!

  • rate this

    Comment number 57.

    #56 well here in kent we have the garden of england being turned into concrete and its not very pleasant.

    A significant reason why land is over price is that of mass uncontrolled immigration , where did the 3_700_000 people go they not all in a single house

  • rate this

    Comment number 56.


    John, 'UK has run out of space', maybe Hendon has, you need to get out a bit, pal.

    Here in the northern wastelands there is plenty space for modern factories, transport networks, public utilities capacity, reasonable priced houses and a skilled English fluent labour force begging for opportunities to improve their lives.

    This two speed UK is real and it hurts all of us.

  • rate this

    Comment number 55.

    54. I agree I think its nuts.

  • rate this

    Comment number 54.

    52 John, 51 TP

    Here's an example of 'ineffective' and wasting space.

    Although it potentially reacts badly with materials in vehicle fuel systems, we are putting ethanol from bio-mass in petrol in the name of sustainability. Growing corn & other crops to produce the ethanol takes space (fields) otherwise used for food production.

    For the present, it's doing more harm than good. Why do it?

  • rate this

    Comment number 53.

    50.WolfiePeters - "I suspect the 'resource' we may run out of first is space on the surface of the planet to support the needs of the Earth, our growing population......"

    For every hungry person in this world there is a fat person in the west eating enough for two.....

    ....& that is before you consider that we humans waste fully 30% of food we produce.....

  • rate this

    Comment number 52.

    50.WolfiePeters"we may run out of first is space"

    Economically speaking space is already so over priced (in Japan & the UK) it has already run out!

    Consider that the pricing of space is the way that economics rations space.

    However we CAN decide to get capitalism to work again, but getting rid of the zombie pricing of the space and returning it to the productive market at a viable price! Or NOT

  • rate this

    Comment number 51.

    " governments working effectively for sustainability "

    And perhaps you might explain what this means?

  • rate this

    Comment number 50.

    I suspect the 'resource' we may run out of first is space on the surface of the planet to support the needs of the Earth, our growing population and our increasing demands.

    I don't expect to see governments working effectively for sustainability in any area, energy, agriculture, our economic systems, the bio-systems of the planet or the human population. We'd better enjoy it, while it lasts.

  • rate this

    Comment number 49.

    SF why no mention of CHINA and its currency manipulation polices.
    It Slave like state operation and the evironmental waste land that CHINA is persuing to gain world dominance ?

    if all other countries go for a MADE AT HOME policy what would happen to CHINA and the world as a result

  • rate this

    Comment number 48.

    Stephanie, as an economist, you of course focus on the new government's economic agenda.

    But the sighs of relief that greeted its election also reflect, I think, perceptions that it is stable and sensible, especially in dealing with the challenge of aggressive Chinese irredentism. A Sino-Japanese war is the last thing the world economy needs (alongside the N Korea and Iranian threats).

  • rate this

    Comment number 47.

    Absolutely spot on about devaluation wars' risk in 2013.

    On the other hand, a greater determination across the globe from political leaders and Central Bankers, especially in developed economies to stimulate activity & demand is both welcome & most necessary.


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