Thomas White Global Investing
Brave New Policies from Japan?
Japan stamp
March 1, 2013
A Postcard from the Asia Pacific
Brave New Policies from Japan?

Time to Shine Japan?

Time to Shine Again: After two decades of failed policies and stagnant economic growth, Japan is embarking on a bolder monetary policy under its newly-elected Prime Minister Shinzo Abe.

Five decades ago Japan was considered nothing short of a miracle. Lacking substantial natural resources and emerging from the ruins of the Second World War, Japan made economic strides purely through ingenuity and industriousness. 

As the small Pacific country raced ahead in myriad industries such as electronics, steel making, and automobiles, it was crowned a high-tech champion. Armed with cash and technology, Japanese companies set out in droves to all corners of the world looking for investment opportunities. For a time, it looked like Japan would buy the world outright even as the rest of the globe viewed the small island with envy.

Fast-forward to today. Japan is still in the spotlight –but for all the wrong reasons. The once high-achieving nation full of vigor is now getting disgracefully low scores for its economic performance. Japan’s nominal GDP in 2012 is roughly at the same level as it was in the 1990. Ever since the real-estate crash of the late 1990’s, Japan’s economic growth has come in fits and starts. Analysts have lost count of the number of technical recessions that Japan has experienced in the past two decades. Some economists are confounded how a nation that once offered best-of-breed products could take a path of ever-shrinking output. Many of Japan’s corporate giants of the past have now been reduced to also-rans.

Experts attribute Japan’s economic decline to a number of factors ranging from changing demographics to rigid corporate structure, and cynical politics to hapless monetary policy. They opine that the potent combination of these factors now undermine Japan’s economic facade built over decades of hard work. Time and again Japan’s politicians have fumbled to come to terms with their country’s economic problems. In fact, Japan has had six prime ministers over the past five years, all trying in vain to root out well-entrenched economic challenges.

The world was waiting for something radical to emerge out of Japan to change the economic course of a nation in deep slumber. And that came in the form of Shinzo Abe, Japan’s newly elected prime minister. Mr. Abe, who came to power in December 2012, started his election campaign by attacking Japan’s central bank – widely regarded as an unusual thing to do.

Japan’s central bank has had a poor record in meeting its inflation target over the past 15 years compared to central banks of other key developed economies, according to Anil Kashyap of the University of Chicago. The inability of Japan’s central bank to meet its long-standing inflation target of 1% has widely been cited as one of the reasons that Japan has not been able to shake off its economic ineptitude of the past two decades. Consequently, soon after Mr. Abe came to power, he coerced the central bank to reach for a much-higher inflation target of 2% for 2014 in an attempt to revive growth.

Economists expect Japan’s central bank to attempt even larger purchases of long-term Japanese government bonds and even bonds of other developed economies to meet inflation targets. Mr. Abe is putting his stamp on the country’s central bank by appointing like-minded economists with bold views on monetary policy for the bank’s top job. He has proposed a handful of ‘reflationary’ economists to head the central bank, who have advocated more monetary easing to lift domestic demand.

Still, Mr. Abe’s monetary policy may be as much a gamble as it is a brave policy. While the inflation target has been revised upwards, many central bankers opined that the chances of meeting the new target are indeed bleak at least through 2014. Furthermore, critics of the plan also are wary about the Japanese government’s prodigal ways in the face of its loose monetary policy. With nominal interest rates remaining low, Japan’s government has ramped up its borrowing over the past decade without a resulting proportionate improvement in the country’s output. Today, Japan’s debt stands at nearly 230% of its GDP. In the short-run Mr. Abe’s policy could help add to the country’s already-high debt figures.

Furthermore, many economists say that while monetary policy is an issue for Japan, other structural factors choking Japan’s economy deserve more attention. According to them, with a diminishing absolute level of population, Japan could still face challenges in lifting demand even with the help of loose monetary policies. They suggest relaxing immigration policy and corporate sector reforms as possible demand boosters for the economy. Some economists suggest that opening up Japan’s services industries such as finance and retail to foreign competition could also provide a fillip.

Whatever the suggestions, Mr. Abe’s unorthodox monetary policy has raised expectations in Japan. The prime minister’s unconventional stance in this direction has lifted hopes that such an approach will be replicated in response to other established issues that have bottled up Japan’s economic potential for over two decades.

Mr. Abe has showed courage. But it remains to be seen if his thoughtful gamble will finally pull Japan out of its comatose state or instead push it deeper into recession.

 

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