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Japan's Abenomics
- 1. Japan’s Abenomics Jing Zeng Email: may.zeng@student.ie.edu imay1017@yahoo.co.jp IE Business School
- 2. Content What is Abenomics? • The economic policies advocated by the Prime Minister of Japan, Shinzo Abe, since December 2012, based upon “three arrows” of monetary policies, fiscal policies and structural reforms. Background • Economic context Abe’s “Three Arrows” • Monetary policy • Fiscal policy • Structural reforms Economic Outlook • Inflation • GDP • Unemployment rate Shinzo Abe, the prime Minister of Japan, Dec.2012-Present Source:https://en.wikipedia.org/wiki/Abenomics
- 3. Background Years of Deflation Consumer Price Index -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 19901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015 Source: Bank of Japan (%) Source: World Bank GDP growth “Lost two decades” Secular stagnation
- 4. Three Arrows Approach A • Monetary policy B • Fiscal policy C • Structural Reforms Purpose: • Exit from Deflation • Boost Economic Recovery
- 5. Monetary Policy Method: OMO – Quantitative and Qualitative Monetary Easing(QQE) – Purchasing Japanese government bonds (JGBs), exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), CP and corporate bonds. Source: Bank of Japan “QQE” Target: 2% inflation
- 7. Monetary Policy Source: Bank of Japan “QQE” QQE Money Supply Depreciation Export Import GDP Inflation Effects
- 8. Monetary Policy Result: Did it reach 2% ? Crude Oil Prices and Energy Prices Consumer Price Index Source: Bank of Japan “QQE” QQE Money Supply Depreciation Export Import GDP Inflation Oil Price Inflation Oil Price
- 9. Effective from Feb.16. Source: Bank of Japan Monetary Policy “QQE with a Negative interest rate” Effects – Negatively affects earnings of financial institutions. – Positively affects borrowing for property and business loans.
- 10. Fiscal Policy Issues Increase in fiscal deficit and debt outstanding – Debt to GDP ratio: around 240% – Social security expenditures and national debt service increase year after year. – Continues to run budget deficits where expenditure exceeds tax revenue. Source: Ministry of Finance of Japan “Consumption Tax Hikes”
- 11. Fiscal Policy Raise consumption tax – Raised consumption tax rate from 5% to 8% in April 2014. Plan to increase to 10% in April 2017. – All of the increased revenue is used for Social Security. Previous 5% April 2014 8% April 2017 10% Consumption tax rate Source: Ministry of Finance of Japan “Consumption Tax Hikes”
- 12. Effect of the Consumption Tax Hikes – Raising prices and reducing households' real disposable income. – Generating a increase in demand prior to the consumption tax hikes, and a decline in demand after the consumption tax hikes. – Affected consumption more negatively than explained by the decline in real income. Fiscal Policy Source: Bank of Japan “Consumption Tax Hikes” Estimated Effect of the FY2014 and FY 2017 Consumption Tax Hikes on GDP Effects of the Consumption Tax Hikes
- 13. Structural Reforms Source: The government of Japan, Japan’s cabinet
- 14. The most serious issue: Lack of labor force Labor participation in 2014 Women: 49.2% Total: 59.4% Men: 70.4% “Lack of labor force” Structural Reforms
- 15. Solutions: More female employees More foreign employees Is it effective? Source: The government of Japan, Japan’s cabinet office “Lack of labor force” Structural Reforms
- 16. “Lack of labor force” Source: Bank of Japan Structural Reforms
- 17. Inflation: Economic Outlook When can it reach 2%? – 2015 → 2016 → 2017 – Effected largely by the crude oil prices – Employees’ wages did not grow much Source: Bank of Japan “Inflation”
- 18. Economic Outlook (%) GDP growth: Why is Japan’s “Potential growth” rate so low? – Lack of labor force – Effect of stagnation 0.29 1.69 2.36 1.30 1.69 2.19 -1.04 -5.53 4.65 -0.45 1.75 1.61 -0.10 0.50 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDP growth Source: World Bank Source: Bank of Japan (%) Will Japan’s GDP grow quickly? – Unlikely, unless Potential GDP grows “GDP growth”
- 19. Economic Outlook Source: Bank of Japan Unemployment rate: Will it continue declining? – Depends on GDP growth – Won’t change much Life-long employment Lack of labor force “Unemployment”
- 20. 0.29 1.69 2.36 1.30 1.69 2.19 -1.04 -5.53 4.65 -0.45 1.75 1.61 -0.10 0.50 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Wrap-up Consumer Price Index Source: Bank of Japan GDP growth (%) Source: World Bank Source: Bank of Japan
- 21. Thank you!
Editor's Notes
- https://en.wikipedia.org/wiki/Abenomics
- Japan’s Consumer Prices in 2015 World bank data
- http://www.oecd.org/eco/surveys/Japan-2015-overview.pdf
- Abenomics’s first arrow was Monetary policy. As we know, Central banks have three basic monetary policy tools, the discount rate, the reserve ratio and open market operations. What Bank of Japan conducted was open market operation. Since the beginning of 2013, Bank of Japan set a inflation target at 2% and started increasing Japanese Government bond holdings. They started purchasing a huge amount of government bond from commercial banks. This graph shows the amount outstanding of government bond holdings in bank of Japan, you can see it increased dramaticly. After a while, Bank of Japan started buying relatively risky assets, such as corporate bonds, and named their monetary policy as Quantitative and Qualitative Monetary Easing.
- In this slide, I will show you how the so called QQE policy effected the economy. It’s biggest effect was Japanese Yen’s depreciation. As we know, currency also applies to the law of demand-supply curve. Bank of Japan buys more government bonds from commercial banks, commercial banks receive more money, so the Money Supply increased, moved from S1 to S2. As a result, the equilibrium price of the currency declined from P1 to P2. This is how the QQE caused Japanese yes’s depreciation. Let’s see how much Japanese yen depreciated. Please look at this graph. This direction shows the depreciation of Yen, this direction shows the appreciation of Yen. This is when the QQE started. This line is Japanease yen to USD exchange rate. You can see before the QQE, the exchange rate was around 80 yen-1 USD, now, it became around 120 Yen-1 USD.
- In this slide, I will show you how the depreciation of Yen effected Japan’s international trade. Lets look at the export first. This line shows the export changes. You can see since the QQE started, the export increased about 1.5% of GDP. Next, lets look at import. Usually, the import will decrease when the currency depreciates. But what happened in Japan? This line shows the import changes. As you can see, the import increased too. Its because Japan can’t produce enough energy by itsself, they need to import energy, especially after the nuclear power plant shut down when the big earth quack happened in 2011. Japanese Yes depreciation increased the costs of importing energy, as a result, the import also increased.
- Now, lets look at the result of the QQE. Has it reached the 2% inflation target? This graph shows the CPI changes. You can see CPI was likely to reach 2%, as the result of Yen’s depreciation and the rise in energy prices, but fell again due to the decline in energy prices.
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf
- The consumption tax hike is likely to have made household sentiment cautious and affected consumption more negatively than explained by the decline in real income. Generating a front-loaded increase and subsequent decline in demand prior to and after the consumption tax hikes.
- The labor force, defined as the sum of the employed and unemployed in the population aged 15 years and over, numbered 65.87 million people in Japan in 2014, up 100,000 (0.2 percent) for the second consecutive year of increase. The 2014 labor force participation rate (rate of the labor force to the population aged 15 years and over) was 59.4 percent (up 0.1 percentage points from the previous year). Observed by gender, the rate was 70.4 percent for men (down 0.1 percentage points) and 49.2 percent for women (up 0.3 percentage points). In share terms, it accounted for 61.3percent of the entire population, continuing its decline since 1993. As a result, the ratio of the dependent population (the sum of aged and child population divided by the productive-age population) was 63.2 percent. Population
- The labor force, defined as the sum of the employed and unemployed in the population aged 15 years and over, numbered 65.87 million people in Japan in 2014, up 100,000 (0.2 percent) for the second consecutive year of increase. The 2014 labor force participation rate (rate of the labor force to the population aged 15 years and over) was 59.4 percent (up 0.1 percentage points from the previous year). Observed by gender, the rate was 70.4 percent for men (down 0.1 percentage points) and 49.2 percent for women (up 0.3 percentage points). In share terms, it accounted for 61.3percent of the entire population, continuing its decline since 1993. As a result, the ratio of the dependent population (the sum of aged and child population divided by the productive-age population) was 63.2 percent. Population
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf Japan's economy has continued to recover moderately, with a virtuous cycle from income to spending operating in both the household and corporate sectors, and the underlying trend in inflation has been rising steadily. Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected. The year-on-year rate of change in the CPI is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent. Meanwhile, assuming that crude oil prices will rise moderately from the recent level, it is likely that the contribution of energy items to the year-on-year rate of change in the CPI will decrease gradually from the current level of slightly more than minus 1 percentage point, but remain negative until the end of fiscal 2016. Based on this assumption, the timing of the year-on-year rate of change in the CPI reaching around 2 percent -- the price stability target -- is projected to be around the first half of fiscal 2017.9 Thereafter, the year-on-year rate of change in the CPI is likely to be around 2 percent on average. Comparing the current projections with the previous ones, the projected rate of increase in the CPI for fiscal 2016 is lower, and the projection for fiscal 2017 is more or less unchanged. The downward revision of the projection for the CPI and the delay in the projected timing of the CPI reaching around 2 percent are due to the assumption of lower crude oil prices.
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf Japan's economy has continued to recover moderately, with a virtuous cycle from income to spending operating in both the household and corporate sectors, and the underlying trend in inflation has been rising steadily. Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected. The year-on-year rate of change in the CPI is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent. Meanwhile, assuming that crude oil prices will rise moderately from the recent level, it is likely that the contribution of energy items to the year-on-year rate of change in the CPI will decrease gradually from the current level of slightly more than minus 1 percentage point, but remain negative until the end of fiscal 2016. Based on this assumption, the timing of the year-on-year rate of change in the CPI reaching around 2 percent -- the price stability target -- is projected to be around the first half of fiscal 2017.9 Thereafter, the year-on-year rate of change in the CPI is likely to be around 2 percent on average. Comparing the current projections with the previous ones, the projected rate of increase in the CPI for fiscal 2016 is lower, and the projection for fiscal 2017 is more or less unchanged. The downward revision of the projection for the CPI and the delay in the projected timing of the CPI reaching around 2 percent are due to the assumption of lower crude oil prices.
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf Japan's economy has continued to recover moderately, with a virtuous cycle from income to spending operating in both the household and corporate sectors, and the underlying trend in inflation has been rising steadily. Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected. The year-on-year rate of change in the CPI is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent. Meanwhile, assuming that crude oil prices will rise moderately from the recent level, it is likely that the contribution of energy items to the year-on-year rate of change in the CPI will decrease gradually from the current level of slightly more than minus 1 percentage point, but remain negative until the end of fiscal 2016. Based on this assumption, the timing of the year-on-year rate of change in the CPI reaching around 2 percent -- the price stability target -- is projected to be around the first half of fiscal 2017.9 Thereafter, the year-on-year rate of change in the CPI is likely to be around 2 percent on average. Comparing the current projections with the previous ones, the projected rate of increase in the CPI for fiscal 2016 is lower, and the projection for fiscal 2017 is more or less unchanged. The downward revision of the projection for the CPI and the delay in the projected timing of the CPI reaching around 2 percent are due to the assumption of lower crude oil prices.
- CPI was likely to reach 2% as the result of Yen’s depreciation and the rise in energy prices, but fell again due to the decline in energy prices. Inflation hasn’t reached 2% of target, due to the decline in energy prices. The economy has continued to recover moderately, exports increased as a result of Yen’s depreciation, but also have been affected by the slowdown in emerging economies. Japan needs to expand labor force to support it’s long-term GDP growth. The 2014 labor force participation rate (rate of the labor force to the population aged 15 years and over) was 59.4 percent (up 0.1 percentage points from the previous year). Observed by gender, the rate was 70.4 percent for men (down 0.1 percentage points) and 49.2 percent for women (up 0.3 percentage points). In share terms, it accounted for 61.3percent of the entire population, continuing its decline since 1993. As a result, the ratio of the dependent population (the sum of aged and child population divided by the productive-age population) was 63.2 percent. Population
- http://www.mof.go.jp/english/budget/budget/fy2016/03.pdf