December 21, 2013
The three arrows
In the year 1606 in the old Japanese imperial capital of Kyoto, an archer named Wasa Daihachiro laid claim to the Tenkaichi championship at the Toshiya archery contest at Sanjusangendo Temple (the one with the 1,001 gilt Buddha statues) when he fired no less than 13,053 arrows, hitting an almost impossible target with 8,133 of them.
Shinzo Abe (Japan’s Liberal Democrat prime minister since late last year) has needed just three arrows for his plan to kickstart Japan’s stagnant economy — early days but his percentage thus far could be higher than Daihachiro’s. He wasted no time firing the first — the Japanese equivalent of “quantitative easing” to pump money into the economy — but this would risk being inflationary rather than reflationary without the other two arrows.
To the monetary arrow Abe has added fiscal and structural bolts, both aimed at more distant targets requiring years, not months. The fiscal side takes the form of raising interest rates in the medium term to reverse the deflationary pull of long-standing zero interest rates and defend the value of the money being pumped into the economy, accompanied by public spending cuts to ensure that the private sector is the recipient of the new cash flow.
The structural side is the most ambitious, involving social engineering as much as economic policy. Japanese stagnation has become such a cliché of global economic analysis that you perhaps have to travel there to realize that in many ways its economy suffers from the problems of success — apart from saturated markets, everything works so smoothly that there seems no need for change (a feeling the visitor rapidly comes to share). Perhaps the only way to break through this complacency would be to restructure society — more women in the workforce to bring down its average age, the deregulation of agriculture and certain petrified services sectors, etc., thus ultimately reviving growth by upgrading productivity. The money thus released would then hopefully go towards job creation, higher wages and more consumption,
The combo of this three-pronged strategy has been almost universally nicknamed “Abenomics” after the audacious prime minister. Yet just as “Abenomics” needs three arrows, so it needs at least three brains to click. One is Abe himself and the second his Central Bank governor since March, Oxford-educated Haruhiko Kuroda — long an advocate of loose monetary policy and the perfect choice for the new path. The third mastermind holds no public post beyond being Special Cabinet Advisor but is widely reputed to be the brain within Abe’s brain-trust — Professor Etsuro Honda.
July 10 was a Honda day for the Herald in Tokyo because it started in the morning admiring the mechanical dexterity of Honda company’s humanoid robot Asimo in the Miraikan Museum and ended in the late afternoon dazzled by Professor Honda’s mental gymnastics in the Prime Minister’s residence — an interview assigned 30 minutes with the meticulous precision of Japanese timetables but which lasted a full hour with Honda clearly enjoying himself.
Despite the surface resemblance between Abenomics and quantitative easing, Honda is adamant that just as the problem is specifically Japanese, so is the solution — Japan’s deflationary spiral ever since the collapse of the so-called “bubble economy” in 1991 is pretty unique in modern economic experience.
In the simplest terms Abenomics proposes to reverse this deflationary spiral by pushing hard in the opposite direction. Honda does not claim total originality for this drive — thus even before the collapse, the discount rate was halved in 1986 while in 1998 stimulus policies were attempted with disastrous fiscal results (Japan ended up with the worst budget deficit and public debt of any OECD nation). Yet neither of these changes sought to change fundamentals.
Where predecessors went wrong, he feels, was in giving up too early and he credits Kuroda with the gumption to see the corrective action through this time. Kuroda aims to persist with drastic quantitative easing over the next two years, doubling the money supply during that period (by which time deflation would be consigned to the past) and shooting for an annual inflation rate of two percent, revolutionary for the Japan of the last two decades.
Honda freely admits that these Bank of Japan targets are more easily set than achieved. Thus the annual inflation rate is still struggling to reach one percent, such is the deflationary inertia, while quantitative easing is slowed by the fact that neutral interest rates are in fact positive while there is deflation (only now changing). This has delayed clear benefits for the consumer market from Abenomics. Yet these counterpressures towards yen appreciation also have their advantages, moderating the exchange rate and sparing Japan accusations of engaging in currency warfare.
Quantitative easing works fine when there is nowhere else for money to go but how vulnerable is it to the United States (where the Federal Reserve’s Ben Bernanke is visibly looking for an exit strategy from QE, which would push up interest rates) — is there a Plan B, the Herald asked?
Any such problems would be relative if that happened (it would be difficult to replace QE as a stimulant of US domestic demand), Honda thought. More depreciation of the yen as a result would be positive while the euro zone’s basic dilemma with the paradox of an optimally stable currency in a continent with deep structural problems (replacing Japan as the global centre of stagnation) would continue. Another paradox — Abenomics has reprieved the euro somewhat in recent months by removing the yen as competition for investors seeking a strong currency.
The economics professor does not see all the answers as lying in economic policy. Yen depreciation would help exports but fuel imports in the wake of the 2011 Fukushima disaster are driving trade figures into the red — Free Trade Agreements will be crucial. Demography is also a key factor — an aging society inevitably makes for less saving.
Asked by the Herald if the success of Abenomics hinged on the economic or the psychological, Honda cheerfully agreed with the latter.
Life grows more complex all the time — perhaps in some distant future a Japanese premier who may or may not be called Wasa Daihachiro will launch an economic plan with 13,053 arrows.