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“ABE-nomics” Can Japan’s “Honest ABE” Emancipate Japan from the 15-year Shackles of Deflation (& win his 3rd “Oscar”)? 18 April 2013 Yosuke KAWAKAMI Minister for Financial Affairs, Embassy of Japan *Views expressed are personal & solely of the speaker 1 Prologue: Japan’s “4-D Syndrome” in Lost Decade Fig. 1 Vicious “4(5)-D”circle (or equilibrium) (∫Deficits =)Debt Demographics Psychological Depression? Even while mired in deflation, economy has grown in real terms But most citizens feel less rich (unless travelling abroad to reap gains from \ appreciation) Deflation Japan & its electronics industry threatened by China & Korean competition2 1. “ABE-nomics”: introduction (Nov. 2012: Honest ABE’s “Gettysburg” Moment) Emancipate Japan from deflation “3 Arrows” (cf. Mouri family precept) Bold Monetary Policy: “(Othello-game) Regime change” Flexible Fiscal Policy: Stimulus & Consolidation Growth Strategy: Innovation & Structural Reform 3 2. Market Reaction: so far, so good Currency: weakened 20% (1$=¥80 → ¥98) Equities: up more than 40% (Nikkei 225: 9000 → 13,200) Interest rates: even lower (10-year JGB yield ≈ 0.6%) N.B. No explicit depreciation target (let alone devaluation) Overdue correction of overvalued Yen (←safe haven demand) induced by recent changes in market fundamentals US recovery Improved outlook for euro’s survival First Japanese trade deficit in 32 years (2011 & 12) (will return to “int’l spillovers”→ p.10) 4 3. Arrow #1: Audacious Monetary Policy 2% inflation target: Joint Gov’t & BoJ Declaration (Jan. 2013) “Utilize all possible measures”: New Governor Kuroda (March 2013) “Quantitative & Qualitative Easing (Q²E) ” (April 3-4 BoJ MPM) “2x4” : Double monetary base (MB) to \270 trln & double JGB duration → achieve 2% inflation in about 2 years “New dimension” in monetary easing Adoption of MB control ; increase MB by \60-70 trln per annum Increase JGB holdings by \50 trln per annum, including longer JGBs (up to 40 years) → for MP purposes (not monetization); temporary suspension of “banknote ceiling” Increase purchases of ETFs & J-REITS Forward guidance: continue Q²E as long as necessary to achieve & maintain target 5 (will return to MP → Epilogue) 4. Arrow #2: Flexible Fiscal Policy (1) Short-term Stimulus “Emergency Economic Measures” (January 2013) ¥10 trln fiscal stimulus: 2% of GDP ←”15-month budget” (2012 Supplementary & 2013 Budget) Accelerate Tohoku reconstruction Reinforce infrastructure Invest in innovation renewable energy & conservation technologies → ¥20 trln economic effect & 600,000 employment 6 4. Arrow #2: Flexible Fiscal Policy (2) Medium-term Consolidation Raise Consumption Tax to 8% (2014) & 10% (2015) Commitment to: Halve primary deficit by 2015 Achieve primary balance (PB) by 2020 (PB = fiscal balance, net of JGB issuance/repayments) 7 5. Arrow #3: Effective Growth Strategy Innovation Biotech: iPS cells & regenerative medicine Robotics & Nanotech Green technology Next-generation infrastructure Deep sea exploration & mining Supply-side: deregulation & structural reform Labour market & nursery services Agriculture reform “Green” industry: renewable & energy conservation “Silver” industry: health & medicine, tourism Free trade negotiations Trans-Pacific Partnership EU-Japan Economic Partnership Agreement 8 6. “ABE-nomics”: Return & Risks Monetary & fiscal stimuli: “Potent (toxic?) medicine” to Kick-start economy, cure depression & avoid “deflationary spiral” cf. “escape velocity” (incoming BoE Governor Carney) → Virtuous circle of stable & sustainable growth led by private C&I Real Growth Nominal Growth CPI CY 2012 2.0% 1.1% -0.1% FY 2013 (projected) 2.5% 2.7% 0.5% Risks? : Yes, “Narrow Path” (or “Economic Tightrope”) (hyper-) Inflation w/o growth Loss of fiscal confidence cf. some firms already responding w/ wage hikes ← corporate retained earnings ← virtual “work-sharing” in past → low unemployment (around 4%), but wages depressed 9 Int’l spillovers?=Maybe; “Currency war”=No 1) G7 Statement (12 February 2013) "We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. …" 10 2) G20 Communique (16 February 2013) 2. Thanks to the important policy actions in Europe, the US, Japan, and the resilience of the Chinese economy, tail risks to the global economy have receded and financial market conditions have improved. 3. …Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates. We commit to monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes. 5. …We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open. 11 Epilogue: Implications for other advanced economies & New dimensions/horizons in monetary policy? 1) “Japanisation” for most advanced economies? prolonged slump due to deleveraging following a severe financial crisis 2) Monetary policy “Civil War”? --- “Orthodox” vs. “Reflationists” Conventional (orthodox) (Zero-bound) Non-conventional (heterodox): “pushing on a string”? ZIRP, QE, “Time-horizon effect” (forward guidance) (pioneered by BoJ) 12 3) Rethink fiscal-monetary “space” in a deflationary/deleveraging “universe”? Fig. 2: “The Global Macro Chessboard” (McCulley&Pozsar; 2013) Inflation Risks Dominate Crowding Out Risks Deflation Risks Dominate No Crowding Out Risks Private Sector “M M” Leveraging Deficits 1 2 3 4 Deleveraging Surpluses 5 QE2 8 9 10 Helic. Money Economics: “dismal science” or “art”? BoJ→ 11 12 QE3 ↓ “B B” McCulley&Pozsar (GIC2013) Lord Turner (FSA/Cass2013) 6 QE1 7 SNB→ “non-Euclidean/Einsteinian” ”sur-realism” dimension BoE→ 13 Austerity Surpluses Fiscal Policy Stimulus Deficits y Sargent Wallace 14 SMP 15 LTRO 16 17 18 OMT→ Unconv. Radical Nuclear QE “Z B” Monetary Independence FMC ~ Conventional Rates Fiscal-Monetary (+Financial) Cooperation ⇔ x “alchemic/Faustian” “Race to the Bottom” (End) 13