Controversy over Japan's stimulation
The Japanese economy badly needs to escape stagnation and avoid the deflation threat that has haunted it for over two decades. The new government led by Prime Minister Shinzo Abe decided from day one to adopt unorthodox and radical economic policies. “Abenomics” constitutes a novel experiment in policymaking closely followed by academics, politicians, and competitors around the world. It is an approach that may upset global patterns of comparative advantage.
In addition to its ambitious public investment program, Abenomics proposes to increase inflation until an explicit goal of 2 percent is reached. This is an aggressive monetary policy like no other in the world right at this moment.
The Bank of Japan is committed to buying enough government bonds to double the amount of money in circulation within two years.
The most visible impact of this policy has been a sudden increase in the pace of economic growth. During the first quarter, the Asia’s second-largest economy expanded at an annualized rate of 3.5 percent. Expectations have built that the rate will hold for the rest of the year.
The IMF and the OECD have both predicted Japan will grow even faster, and become the fastest-growing developed economy in the world. Inflation, however, continues to fall at a rate of 0.4 percent in April compared to 0.5 percent in March.‥
But there are other consequences, and that’s where the controversy begins. The yen has depreciated as Japanese investors have purchased bonds and equities denominated in other currencies. Japan’s most important trading partners, China and South Korea, have not kept their discomfort to themselves, noting the potentially destabilizing effects of Abenomics.
Seoul has asked the G8 to discuss the newly-created situation at its next meeting in late June. Japan’s actions add fuel to the global currency wars. The yen has lost some 20 percent of its value since the beginning of the year.
Still, the IMF has blessed Japan’s new policies, with just a few objections, considering the currency exchange problem as a minor issue. They would much rather see the world’s third-largest economy growing again than languishing in a continued deflation.
In fact, it is true that it would be better to increase global growth now and worry about exchange rate realignments later. It must be remembered that Japan is a major surplus economy that makes a large net contribution to global capital outflows.
Thus, everyone can benefit from a Japanese economic boom.
An economic expansion would also help Japan reduce its current 240 percent debt-to-GDP ratio, the highest among the large economies. Abenomics seeks to address this issue through structural reforms favoring a sustained increase in business investment, wages, and productivity. It would be a better solution than increasing taxes, especially sales taxes.
Should Abenomics be replicated elsewhere? Japan’s economic and financial realities are very different from those in the United States. It has endured a prolonged period of stagnation and deflation, its mountain of government debt is mostly owed to Japanese households, and it continues to generate a large current account surplus with the rest of the world.
Moreover, the U.S. dollar continues to be the most important reserve currency. Thus, the U.S. cannot possibly implement Abenomics, at least not in the same way. The eurozone is also different, although a certain dose of Abenomics coordinated at the European level might be better medicine than the present policy of austerity.