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Lessons from Japan:
How Abenomics Can Provide Solutions
for Advanced Countries
Yasushi Kinoshita
Former Administrative Vice Minister, Ministry of Finance, Japan
Visiting Fellow, Center on Japanese Economy and Business, Columbia Business School
November 11, 2014
1
Introduction
• The United States faced financial turmoil from the Lehman Shock in
2008 and Europe also encountered a financial crisis in 2011.
• Europe is now on the verge of deflation.
• Chinese economy, with a huge current account surplus, is under the
continuing pressure of currency appreciation and China will soon
face problems with a rapidly growing aging society.
• All of these problems are what Japan has already experienced in
1990’s.
“Japan is an advanced country of problems. ”
2
Financial Crisis in Japan
• Japan experienced an unprecedented financial crisis after the
collapse of its bubble economy, especially in 1997 and 1998.
• The total number of banks that filed for bankruptcy was 181 from
1991 to 2003.
3
Deflation in Japan
• GDP deflator and CPI fell into the negative zone in the 1990’s and
this situation has continued for 20 years since then.
• The number of regular workers has dropped and wage has also
fallen.
• People were gradually losing their animal spirits and the
profitability of corporations are kept low.
4
Aging Society in Japan
• The speed of aging in Japan is the fastest in the world.
• 30% of population will be over 65 years old in 2025, and 40% in
2050.
• The medical care cost per capita of individuals over 65 years old
people is three times that of individuals under 65 years old.
Individuals who are over 75 years old is five times that amount.
• As a result, that expenditure has been growing by 10 billion dollars
each year.
• The debt GDP ratio is 230% now and this number is still rising.
5
Lessons from Japan: Financial Crisis
I. Monetary easing and fiscal stimulus were carried out as
macroeconomic measures.
• Adopted the zero target rate in 1999 and monetary easing for
the first time in 2001. They were suspended in 2006.
• The volume of fiscal stimulus in 1998 reached nearly 8% of GDP.
II. The Banking Policy
• making strict loan assessments and obliging loan loss reserves
• requiring mergers with sound banks
• protecting all the deposits by using DIC’s insurance premium
and tax dollars, 10 % of GDP.
6
Lessons from Japan: Deflation -1
• What is the reason for this long deflation?
– “Fallacy of Composition”- Rational actions by each person made deflation
worse as a whole.
– People lost their animal spirits.
– The shift from regular employment to part-time employment.
• The 1st arrow is ultra-monetary easing.
It is called Quantitative Qualitative Monetary Easing (QQME). It aims to lift CPI
to 2% in 2 years from 2014 (April) by doubling monetary base through the
purchase of JGBs, ETFs, etc.
• The 2nd arrow is flexible fiscal policy.
7
Lessons from Japan: Deflation -2
The 3rd arrow is growth policy i.e. structural reform.
Examples include:
• Electricity sector reform
• Agriculture reform
• Enhancement of Corporate Governance
– Outside directors, Stewardship code
• Corporate tax reform
– The current corporate income tax rate is 35.64%. The government aims to
reduce the percentage level of the corporate tax rate down to the twenties in
several years.
– Broadening the tax base by enhancing the pro-forma standard taxation
8
Lessons from Japan: Aging Society
• GDP Ratio: 1.1 trillion dollars, 23% of GDP, are used for social
security every year. The first step is to not increase this ratio.
• Consumption Tax: The ratio of expenditure for public pension to
GDP can be around 10 %, its current level, in the future. But the
ratio for the cost of medical service and nursing care will keep rising
if no reforms are addressed. The last option is to hike consumption
tax even more.
• Remaining Issues “The Causes of Huge Government Debt”
• We haven’t collected permanent tax revenue which was enough
to sustain the social security system, i.e. adults put these
burdens onto their children.
• Tax revenue dropped because of deflation and tax cut for
stimulating the economy. 9
What is the Core of the Abenomics?
• Creation of inflation expectations by QQME
• Comprehensive policy package
• The last chance to get rid of long-standing deflation
10
Conclusions
What is the condition for Abenomics to keep succeeding?
• The stability of government
• The credibility in fiscal consolidation
• The resolution of energy issues
11
1.Current Economics Situation
＜Real GDP growth rate＞
4.0
＜CPI＞
2.5
CPI
2.0
3.0
CPI (core)
1.5
2.0
1.0
1.0
0.5
0.0
0.0
▲ 1.0
▲ 0.5
▲ 2.0
▲ 1.0
▲ 3.0
▲ 1.5
▲ 2.0
▲ 4.0
1994
1996
1998
2000
2002
2004
2006
2008
2010
1994
2012
＜Nikkei Stock＞
25,000
1996
1998
2000
2002
2004
2006
2008
2010
2012
＜USD/JPY＞
160
150
20,000
140
130
15,000
120
110
10,000
100
90
5,000
80
70
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
12
1994
1996
1998
Source: Cabinet office, Ministry of Internal Affairs and Communications, Bloomberg
2000
2002
2004
2006
2008
2010
2012
2014
2. CPI and Wage
（Average annual growth (increase) rate after 2000, ％）
CPI
3.5
Nominal
wage
3.0
Real GDP
3.1
3.1
2.8
2.6
2.4
2.5
2.3
2.3
1.9
2.0
1.7
1.8
1.7
1.6
1.4
1.5
1.3
1.2
0.9
1.0
0.5
0.0
▲ 0.2
▲ 0.5
▲ 1.0
▲ 0.9
▲ 1.5
Japan
US
UK
Germany
Price Stability
Target : 2%
Inflation Goal:
2%
Inflation Target:
2%
13
（Source) OECD.stat
France
(Euro area) Quantitative Definition of
Price Stability:
Below, but close to, 2%
Sweden
Inflation Target:
2±1％
3.Ratio of People Older than 65 years to the Total Population
（％）
40
35
30
1970
2000
2030
1970
→2000
2000
→2030
Japan
7.1
17.4
31.6
10.3
14.2
Germany
13.6
16.3
28.2
2.7
11.9
France
12.9
16.0
23.2
3.1
7.2
U.K.
13.0
15.8
21.7
2.8
5.9
U.S.
9.8
12.4
20.1
2.6
7.7
China
3.9
6.9
16.2
3.0
9.3
25
Japan
Germany
France
U.K.
China
Japan：23.0
Germany：20.8
U.S.
20
France：16.8
15
U.K.：16.6
10
U.S.：13.1
5
0
China：8.4
1950
1970
2000
Source: Japan 1950-2010: “National Census” (Ministry of Internal Affairs and Communications)
2011-2050: “Japanese Future Demographic Projections” (National Institute of Population and
Social Security Research) (January, 2012)
Other countries: “World Population Prospects: the 2012 Revision” (United Nations)
14
2010
2030
2050
(CY)
4. Fiscal Consolidation Targets
Primary Surplus
(%)
0.0
-2.0
-2.4
-3.3
-3.2
-4.0
-2.7
-1.8
-2.9
-5.1
-6.6
-6.0
-6.2
-8.0
-10.0
●:Economic Revival Case
◆:Reference Case
▲:PB Target of Central and Local Governments
-12.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: Cabinet Office
15
(FY)
5. Trend in General Account
（trillion yen）
120
【Flow】
(Unit: trillion yen)
FY2014
43.0%
Bond Dependency Ratio
General Account Primary Balance
100
【Stock】
80
101.0
100.7
-18.0
(Unit: trillion yen)
As of end-FY2014
（Percentage of GDP）
89.0 89.3
780（156％）
Long-Term Debt Outstanding of
Central and Local Governments
1,010（202％）
75.1
73.6
75.9
95.3
84.9 85.5
84.8 83.7
82.4
81.4 81.8
84.4
Government Bonds Outstanding
(General Bonds Outstanding)
78.8 78.5
97.1 98.1 95.9
84.7
Total Expenditures
69.3 70.5 70.5
65.9
61.5
57.7
60
50.6 51.5
53.0 53.6
46.9 47.2
43.4
24.5
20
13.8
15.7
26.9
21.9
20.9
5.3
0
3.2
2.1
3.7
3.5
5.0
4.5
53.9
49.4
29.0
30.5
32.4
50.7
47.2
49.1 49.1
47.9
43.8 43.3
51.0
52.0
50.0
45.6
44.3
34.9
35.0
34.0
Construction Bond Issues
Special Deficit-Financing
Bond Issues
35.3
35.5
33.2
33.0
31.3
30.0
13.2
9.1
6.7
8.7
11.1
17.0
18.4
19.9
27.5
25.4
7.8
9.1
12.9
14.0
13.5 12.8 12.3
10.7
7.1
7.0
7.0
7.0
6.8
6.4
6.3
4.3
9.5
9.4
6.3
7.2
6.6
6.2
6.3
6.7
6.9
6.3
7.2
5.9
7.0
6.7
6.4
6.0
5.0
6.2
2.5
1.0
6.4
6.3
6.7
9.9
16.4
16.2
9.5
9.2
0.8
0.2
24.3
16.9
12.3
41.5 42.8
7.6
8.4
34.7
34.4
43.9
42.9 41.3
11.4
7.0
6.0
36.0
35.8
35.2
6.0
36.9
10.7
42.3 42.8
45.4
6.4
18.5
13.2
11.3
47.5
7.0
16.2
14.2
15.0
38.7
37.5
17.3
9.6
51.0 51.9 52.1
Tax revenues
41.9
23.7
13.5
7.2
54.4 54.1
38.2
34.1
29.1
54.9
50.8
46.8
38.8
40
60.1 59.8
25.8
21.9
20.9
28.7
26.8
23.5
26.2
21.1
19.3
8.5
2.0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
（FY）
（Note1）FY1975-2012: Settlement, FY2013: Including supplementary budget, FY2014: Initial budget
（Note2）Following various bonds are excluded: Ad-hoc Special Deficit-Financing bonds issued in FY1990 as a source of funds to support peace and reconstruction activities in the Persian Gulf
Region, Tax reduction-related Special Deficit-Financing bonds issued in FY1994-1996 to make up for decline in tax revenues due to a series of income tax cuts preceding consumption tax
hike from 3% to 5%, Reconstruction bonds issued in FY2011 as a source of funds to implement measures for the Reconstruction from the Great East Japan Earthquake, Pension-related
Special Deficit-Financing bonds issued in FY2012,2013 as a source of funds to achieve the targeted national contribution to one-half of basic pension.
（Note3）General Account Primary Balance is calculated by subtracting Primary Expenditures from the sum of Tax Revenues and Other Revenues: It is different from the Central Government
Primary Balance on SNA basis.
16
6. Retained Earnings
(%)
(Trillion Yen)
350
68.1
Retained Earnings(left)
64.4
328.0
70
65
61.2
A percentage of Nominal GDP of Retained Earnings(right)
59.5
300
57.2 56.7
304.5
293.9
281.7
52.5 279.8
60
55
268.9
49.6
250
269.4
252.4
50
45
40.6 40.0
200
38.0
37.9
36.9 203.9
202.2
188.9 185.3
194.2 33.5
31.0
150
28.2 28.4
134.5
127.3
28.9 29.1
27.9 28.1 28.2 27.4
40
35
167.9
157.0
25.7
139.8 140.6 138.5 141.6 145.3
142.8
131.1
100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(F Y)
17
Source: Cabinet office, Ministry of Finance
30
25
20
7. Women's Labor Force Participation Rate
(%, rate indicates year average)
90
1980
80
1990
2000
70
2012
Jul. 2014
60
50
40
30
<Women's Labor Force
Participation Rate >
20
Japan：63.4％
Sweden：77.9％
* Average rate of 2012
10
0
15-19
20-24
25-29
30-34
35-39
40-44
Source: Ministry of Internal Affairs and Communications, etc.
45-49
50-54
18
55-59
60-64
over 65
8. Japan’s External Sustainability
(Trillion Yen)
35
Primary income
Goods
Services
Secondary income
Current account
Goods & services
30
25
20
15
10
5
0
-5
-1 0
19
Source: ”Balance of Payments” Ministry of Finance
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-2 0
1985
-1 5