On December 15, 2015, Associate Prof. Indradeep Ghosh of MDAE delivered an invited lecture entitled “Will Abenomics work in Japan?” at the Symbiosis School of Economics in Pune.
Prof. Ghosh started the talk by pointing out that the Japanese economy has been stagnating for the last 25 years, despite numerous efforts by both fiscal and monetary authorities to revive it. In 2012, newly elected Prime Minister Shinzo Abe announced a reform program designed to kickstart the Japanese economy, and the question is whether this reform program, called “Abenomics,” will succeed.
In order to answer the question, Prof. Ghosh pointed out that it was necessary to interrogate the reasons that Japan has stagnated for the last 25 years, and also the reasons that policy efforts have failed to deliver the desired result. Growth during 1960-90 was 6% p.a. on average but growth thereafter, during 1990-2014, has been only 0.8% p.a. The primary reason for the dramatic slowdown was the bursting of a real estate asset price bubble that left the banking system paralyzed. Since 1990, the Japanese government has implemented numerous fiscal stimulus packages with little effect. Likewise, the Bank of Japan has cut interest rates to virtually zero and massively grown bank reserves, again with little effect.
The reason that fiscal spending failed is that the spending did not amount to new credit creation. Essentially, Prof. Ghosh pointed out, credit is the lifeblood an economy, and especially after the bursting of an asset prices bubble, what is needed is a broad-based program of credit expansion that will introduce new purchasing power into the economy. Neither the fiscal nor the monetary authorities undertook such a program, which is also sometimes called quantitative easing.
True QE, Prof. Ghosh pointed out, amounts to targeting Nominal GDP and then making available whatever credit is necessary to achieve that target. True QE does not target monetary aggregates, or the interest rate, or the inflation rate – yet the first two of these are what the Bank of Japan had been targeting prior to Shizo Abe’s election.
Abenomics consists of “three arrows” of policy reform. On the monetary policy side, Abenomics targets the inflation rate, the first time this has been attempted in Japan. On the fiscal policy side, Abenomics plans yet more rounds of fiscal stimulus financed by a consumption tax. And finally, the third arrow consists of structural reform measures to remove existing distortions in the Japanese economy.
Prof. Ghosh concluded that Abenomics is unlikely to work in Japan because none of the three arrows of reform amount to true QE. The beneficial impact of greater government spending will most likely be undone by the consumption tax hike. Structural reform takes time to implement, and even longer to yield its benefits. Besides, structural reform does not really affect actual output but only potential output. So structural reform is unlikely to revive the Japanese economy quickly. Finally, inflation targeting is also not likely to work because the manner in which the Bank of Japan is attempting to meet an announced target of 2% is similar to what has been tried in the past – injecting cash into the banking system thereby growing reserves, which as has been mentioned earlier, does not amount to true QE.
For the presentation click here.
Date(s) - 15/12/2015 - 16/12/2015