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On February 5, BOJ Governor Masaaki Shirakawa announced that he will step down on March 19, three weeks early. Shirakawa’s departure accelerates a BOJ (Bank of Japan) leadership transition that will support the push for more aggressive monetary easing by Japan’s new Prime Minister, Shinzo Abe. Shirakawa’s early exit coincides with the scheduled departures of the BOJ’s two Deputy Governors.
The message is clear. With new leadership under three new members of its nine-member governing board, BOJ will be serious about printing more money, a lot of it, to buy domestic and foreign bonds in order to achieve the two percent inflation target it adopted on January 22. The result has been, and will continue to be, a sharp depreciation of Japan’s currency that will be the focus of the G-20 meeting of finance ministers and central bankers that starts February 15 in Moscow. Japan PM Abe’s upcoming February 20-24 visit to the US will likely include discussion of the contentious currency issue.
Japanese Prime Minister Abe is taking a double-barreled approach to shock Japan out of its deflationary torpor. In addition to pressing hard for the BOJ to boost inflation, he has initiated a huge public works program dubbed “Abe-nomics” worth about 2.6 percent of GDP, which will sharply boost government spending and its bond issuance.
The Abe government has made no secret of the fact that the aim of the Bank of Japan’s money printing and foreign bond purchases should be to depress the value of the yen so as to increase the competitiveness of Japanese goods in global markets while changing Japan’s deflation into inflation. But Abe is also boosting domestic demand with a big surge in public works projects. The boost in domestic demand will help to reduce criticism from Japan’s trading partners, like the United States, over the weaker yen policy. Japan’s reply can be that it is part of a concerted effort to save the Japanese economy from total collapse, something that would certainly not benefit the US.
The US Treasury has not cited China as a currency manipulator over the past decade during its huge dollar-buying intervention to avoid appreciation of its currency. Is President Obama going to take a tougher stance against our ally Japan? I doubt it, but we shall see first-hand during Abe’s US visit next week.
Abe has strongly telegraphed his double-pronged approach to reignite Japanese growth since November of last year, in frequent public statements during and since his successful election campaign. His announcement of the new growth initiative along with the Bank of Japan’s January 22 announcement of a 2 percent inflation target instead of its tepid heretofore ignored 1 percent inflation target has produced results. The Japanese yen has depreciated by over 16 percent from 80 yen to the dollar to about 93 yen to the dollar over the past two months.
Simultaneously, Japan’s stock market has risen by nearly 25 percent from a low of about 8,200 on the Nikkei last fall to over 11,000 today. The stock market is forward looking, and the price rises signal anticipation that Japan’s additional monetary and fiscal stimulus will help domestic companies increase their expected profits . The weaker yen will help trading companies, and. the rising stock prices enhances the wealth of Japanese households and helps boost domestic demand through higher consumption and growth. Abe will answer critics of a “weak yen” policy by pointing out correctly that a Japan growing at 3 percent nominal rate, even with a weaker yen, is a better trading partner than a stagnant, deflationary Japan with a stronger yen.
It is likely, given the Abe government’s determination to pursue expansionary fiscal and monetary policies even in the face of foreign criticism, that Japan’s stock market will rise further, perhaps even doubling in value over the coming year. Most global portfolio managers have long since given up on Japan as a viable investment, having been repeatedly burned by trying to predict a recovery in Japan. They are underweighting Japanese assets by at least $60 billion, according to Goldman Sachs.
Japan’s stimulus measures are unambiguously inflationary. They are meant to be so. The Bank of Japan has been instructed to target 2 percent inflation for a good reason. This benchmark will boost nominal GDP and thereby boost tax revenues. It will further elevate expected profits in Japanese firms, push up the stock market, and may even push up the value of the housing sector and commercial real estate. The resulting wealth recovery, which could be substantial, could put Japan back on a sustainable path of positive growth through higher productivity.
During the first year of operation, Japan’s aggressive money printing program can hold steady the current level of nominal interest rates. As Japan’s deflation ebbs and prices and growth begin to rise, heavy bond purchases by the Bank of Japan will keep interest rates low and further stimulate the economy. Holding five-year interest rates steady at 0.2 percent once nominal growth rises to 3 percent would reduce the growth of Japan’s debt-to-GDP ratio by 2.8 percent per year. Eventually, higher growth and inflation will require the Bank of Japan to rein in its expansionary policy to keep inflation from rising above 2 percent, but this problem is far down the road. First, Japan needs to pursue expansionary monetary and fiscal policy to get its economy growing again. If its new Prime m Minister Shinzō Abe has his way, that is exactly what will happen.
John H. Makin is a resident scholar at AEI.
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