Lars Christensen nails it on the confusion surrounding Abenomics:
There has been a lot of focus on the fact that USD/JPY has now broken above 100 and that the slide in the yen is going to have a positive impact on Japanese exports. In fact it seems like most commentators and economists think that the easing of monetary policy we have seen in Japan is about the exchange rate and the impact on Japanese “competitiveness”. I think this focus is completely wrong.
While I strongly believe that the policies being undertaken by the Bank of Japan at the moment is likely to significantly boost Japanese nominal GDP growth – and likely also real GDP in the near-term – I doubt that the main contribution to growth will come from exports. Instead I believe that we are likely to see is a boost to domestic demand and that will be the main driver of growth. Yes, we are likely to see an improvement in Japanese export growth, but it is not really the most important channel for how monetary easing works.
This story is not new. The abandonment of the interwar gold standard in the 1930s by many countries spurred domestic demand and was behind the subsequent sharp recoveries, not any export growth generated by the competitive devaluations. For if everyone is devaluing, there is no place to send additional exports. That was true in the 1930s and is true today.
With that said, the competitive devaluation arising from Abenomics may be the catalyst to kick start the ECB into more serious efforts if they care about the Eurozone's external competitiveness. The ECB may ease to keep the Euro from getting too expensive and in the process shore up European domestic demand. How ironic it would be if Abenomics were to accomplish in the Eurozone what intense human suffering could not: moving the ECB to forcefully act.
To set the record straight, the jury is still out for Abenomics. But it involves Bank of Japan buying stocks, ETFs, REITs etc. Abenomics is more fiscal than monetary in essence. Fed's unconventional policies are fiscal in disguise as well. Central banks are just intermediaries by design. Pure monetary policy is not enough to dig us out of this slum.
ReplyDeleteGood points here about the fiscal nature of Abenomics. Monetary policy will be ineffective in raising labor share for better domestic demand. Fiscal policy has to target higher labor share. I don't know if the fiscal projects planned in Japan are targeting a higher labor share. There is still much resistance from Japanese business to raise labor share.
DeleteLet's hope Abenomics works, and they stay strong on QE for a long time.
ReplyDeleteThe Fed seems to be sticking with QE, and we hope for more stalwart action there too.
The People's Bank of China has a 3.5 percent inflation ceiling target, and they are well below that now, so we can hope for some stimulus there too.
The Bank of England and the Bank of Thailand are both thinking about stimulus, not inflation-fighting, and there may be a few other aggressive central banks out there.
That leaves the ECB. Will they get a clue?
David: can you address the apparent contradiction of raising consumption taxes (a fait accompli over the next 1-2 years) while also trying to spur domestic demand, or can these two policies coexist to simultaneously delever the state's balance sheet while also raising ngdp?
ReplyDelete