Amidst a relatively quiet calm in the occident, fiscal slope/cliff/bungee notwithstanding, it's safe to say that the story of the week and of the new year is very much the story of the East's 'Abe'. Questions have arisen, currency and equity markets have reacted (look what happened to the Yen) and as forecasters dare to look forward, the concept of monetization has arisen once again. Floyd Norris captures this well in a column barely over a week ago where he tries to delve deep into the heart of the Japanese economy.
The Japanese economy has been stagnant for a really really long time. In a long-term low interest-rate environment, it has suffered (?) from chronic deflation again and again. Theoretically of course, as interest rates approach the ZLB, one would think a central bank could do very little more but of course the past few years have shown otherwise. Here's a longgg history of Japanese price levels:
It's common knowledge that Bernanke the scholar was named "Helicopter Ben" for his inflation-fighting endorsement of printing cash (helicopter drop). And Abe has a renewed aggressiveness after the landslide. He's put immense pressure on the central bank and called for specific inflationary targets to rid the economy of this deflationary malaise.
One would assume that Japan should have, could have and would have tried this in the past but such a path is fraught with danger. With an extraordinarily high stock of government debt, a mis-crafted move could wreak havoc on bond prices and send the central bank balance sheet out of control. For credibility to be established, as Norris suggests, minute attention would have to be paid to a faster pace of credit growth and some sort of band or target for the yen (currency wars anyone?).
Of course, changing inflationary expectations could yield wonders for the country's debt. After all, in a deflationary environment with stagnant growth, the debt-to-GDP ratio worsens even without additional borrowing. Furthermore, a global recovery, renewed demand would improve the deteriorating current account etc. Then there's the problem of demography, the country's declining and aging working population coupled with a relatively hostile attitude to immigration.
There seem to be too many structural problems over the long-term but that's no argument against change. For too long, Japan has gone down a path with no change - a relatively safe path if you will. Abe's mandate makes things exciting and and perhaps gives his country something to look forward to, one way or another.
The Japanese economy has been stagnant for a really really long time. In a long-term low interest-rate environment, it has suffered (?) from chronic deflation again and again. Theoretically of course, as interest rates approach the ZLB, one would think a central bank could do very little more but of course the past few years have shown otherwise. Here's a longgg history of Japanese price levels:
It's common knowledge that Bernanke the scholar was named "Helicopter Ben" for his inflation-fighting endorsement of printing cash (helicopter drop). And Abe has a renewed aggressiveness after the landslide. He's put immense pressure on the central bank and called for specific inflationary targets to rid the economy of this deflationary malaise.
One would assume that Japan should have, could have and would have tried this in the past but such a path is fraught with danger. With an extraordinarily high stock of government debt, a mis-crafted move could wreak havoc on bond prices and send the central bank balance sheet out of control. For credibility to be established, as Norris suggests, minute attention would have to be paid to a faster pace of credit growth and some sort of band or target for the yen (currency wars anyone?).
Of course, changing inflationary expectations could yield wonders for the country's debt. After all, in a deflationary environment with stagnant growth, the debt-to-GDP ratio worsens even without additional borrowing. Furthermore, a global recovery, renewed demand would improve the deteriorating current account etc. Then there's the problem of demography, the country's declining and aging working population coupled with a relatively hostile attitude to immigration.
There seem to be too many structural problems over the long-term but that's no argument against change. For too long, Japan has gone down a path with no change - a relatively safe path if you will. Abe's mandate makes things exciting and and perhaps gives his country something to look forward to, one way or another.
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