Posts tagged deficit

Is Abenomics Coming to a Halt?

Abenomics

Abe Shinzo, the Japanese Prime Minister, advocates yen devaluation

Wall Street Journal: Abenomics Will Be Felt Beyond Yen

Hankook Ilbo(Korean): 아베노믹스 ‘거꾸로 효과'(Abenomics ‘Reverse Effect’)

Abe Shinzo had explicitly announced that he would artificially devalue yen in the hope that this will help its export-dependent economy. His idea was that devaluation of yen against other currencies, especially USD, would improve price competitiveness of Japanese products overseas. This announcement was quickly criticized by many nations dependent on export such as Korea and Germany.

The Japanese government said that it would pump ‘infinite’ amount of money supply in the economy until it reaches its target inflation rate of 2%, thus achieving the devaluation of yen. Wall Street Journal expected that the inflation rate would make it less attractive for Japanese households to save and invest their money else where or simply use them to go on shopping. “Deutsche Bank said in a note Wednesday, spurring a “meaningful reallocation” of these deposits into offshore assets.” Therefore, Abe’s policy should have helped to vitalize the consumer sector of Japanese economy and at the same time increase its export to foreign countries.

However, Hankook Ilbo, a Korean newspaper, has published an article that Abe’s devaluation of yen is actually having a reverse effect on Japanese economy. According to the report published by Japanese Ministry of Finance in February 20th, 2013, exports decreased 9.4% compared to the previous month, while imports increased 8.2%. This resulted in 1.63 trillion yen deficit.

The newspaper analyzed that the main reason for this deficit is the rising prices for the energy imports due to the yen devaluation. The nation has been importing more of energy supplies such as LNG, oil, and naphtha, as it tried to diversify energy usage and reduce nuclear power following the Fukushima Nuclear Accident. According to Hankook Ilbo, “If Japanese firms fail to significantly recover from this deficit, Abenomics will be hit hard.”

In addition, many Japanese firms are showing their reluctance in raising wages for workers, which is very important for Abenomics to work in order to revive the real economy. They believe that devaluation alone will not simply rejuvenate the economy. Many Japanese companies have been outsourcing their factories overseas and it would be very hard to retrieve all those back to Japan in very short period.

Of course, it has only been several months, so it will be hard to tell whether Abe’s yen devaluation is doing well for the Japanese economy. But, I think that, from reading these articles, it would be better off for a Japanese economy to appreciate yen due to significant the increase in the energy import. The devaluation certainly is doing no good for Japanese economy and disturbing other export-driven economies such as Korea, Germany and etc.

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California’s Tradable Permit on Oil Refineries

Californian Government Implements Tradable Permit on Oil Production

The Reporter: News Article

According to The Reporter, California decided to implement the tradable permit policy for the production of oil, which is responsible for the global warming. The government has budget deficit of “$9 billion” and it hopes to gain “$14 billion” by 2015, profiting from auctioning tradable permits to the oil companies.

The main reason for implementing tradable permit policy is that there is a negative externality associated with the production of oil. The social cost exceeds the private cost and this makes the society to take care of the environmental cost. In order to internalize the cost of pollution of the oil production and move the quantity supplied from Q market to Q optimum, the Californian government introduced tradable permit.

The government or EPA sets the amount of pollution allowed and auctions the pollution rights (tradable permits) to the oil companies. If the amount of tradable permit is appropriately chosen, it effectively moves the quantity supplied to Q optimum both eliminating the negative externality and increasing the government profit. The government would profit P times Q optimum amount of money.

However, some critics argue that the increase in the price of oil will increase the overall price of consumer goods. The cost of production will increase for virtually all the consumer goods that are produced from oil-running factories. Also, the means of transporting goods from city to city will be more expensive. All this will contribute in increasing the price of consumer goods. The economic size (or social welfare) would decrease also.

The overall increase in the price of oil and the price of consumer goods will lead to the decrease in the consumer spending overall. United States, especially California, is a place where the public transportation is not as advanced and popularly used as Korea. People usually drive their cars to go to work and go shopping. The increase in the price of oil will act as a disincentive for the people to go out on shopping. This will shift the demand curve from Demand 1 to Demand 2 decreasing the price of consumer goods from P2 to P1 and decreasing the quantity demanded from Q1 to Q2. Again, the economic size (or social welfare) will decrease. Some argue that the tax revenue form the taxes such as VAT will decrease countering the benefits by profits from implementing tradable permits.

In conclusion, the tradable permit will increase the profit of Californian government and at the same time cut down the level of pollution contributing to the global warming. However, the government should be fully aware of the complicated consequence or unintended effects of implementing any sort of policy distorting the market will have.

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Yuan Rise Harmful for Chinese Economy

Yi Xiaozhun says the currency has been turned into a political issue

BBC News: News Article 1, News Article 2

According to BBC News, allowing the yuan to strengthen against the dollar would hurt the Chinese economy in the short-term.

If yuan strengthens against the dollar, the Chinese firms or international firms in China will have difficult time exporting their products to foreign markets. Because Chinese economy and growth is heavily depended on its exports to foreign markets, especially US market, it is resentful toward the appreciation of yuan against US dollar.

The minister Yi Xiaozhun argued that if yuan value rises, the Chinese economy would suffer short-term economic depression. China has already experienced its first ever trade deficit of $7.2bn and if the appreciation of yuan takes place, this trade deficit would be aggravated. Some experts say that this could be a short-term phenomenon due to unplanned importing, however, it could be a serious problem for Chinese economy if yuan appreciates.

In sum, China will suffer economic depression if its currency, yuan, rises against US dollar. Thus, even if United States politically, diplomatically pressures China, China will never give up due to this its pivotal role in Chinese economy.

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Analysis on Japanese Crisis

Japanese Economy is in Deep Coma

Times Online: Click Here

According to Bronwen Maddox on Times Online, Japanese Crisis resulted from extremely inefficient bureaucracy culture, lack of risk-taking, aging population, and bad governmental budget.

The article states that Japanese government (local and central) have debt over 180% of Japan’s GDP. That means, the Japanese government has to pay almost double the country’s GDP to the lenders, who are mostly Japanese citizens. So, the Japanese government is carrying the unexpectable time-bomb of national bankruptcy. Japan is the second highest in debt percentage to GDP in the world, after Zimbabwe’s 200%. However, Zimbabwe’s GDP is so infinitesimal compared to the world’s second biggest Japanese GDP. So Zimbabwe could get support from other countries, but Japan will not be able to survive the misery even if there were some supports from other countries.

The main reason for Japan’s enormous debt is the Japanese government’s bad planning for budget. According to the article, over 45% of the governmental spending was borrowed from Japanese people’s savings. This kind of spending started from 1992, so this debt accumulated for 20 years until the debt almost went up to twice the country’s GDP. United States had deficit governmental spending just like Japan, however, Obama passed the Budget Plan for 2010 to minimize the deficit and ultimately get rid of the debt. Japan is not taking any actions to minimize and get rid of debts they are carrying. Instead, the new government is increasing the deficit almost forced by its populist economic policies. If the new government does not cancel its policies and sketch a new way to get out of this misery, Japan will face more serious problem than ‘lost decades’ : a bankruptcy.

There why are Japanese government spending so much money? My answer to this question was that Japanese people did not want to use money. That is why the Japanese government has to release money to the paralyzed Japanese market. I have heard and read that many Japanese people had lack of confidence in their futures because of the prolonged economic recession in Japan (lost decades). Even if they have one of the highest GDP per capita in the world, they do not use money in fear of another economic recession. This is called leakage in economic term. So Japan is suffering from deflation because of very very low demands in domestic market. Japanese domestic markets do have money to spend, however, people simply chose not to and save it. That is why Japanese companies are having a bad time in the domestic market. To get back to the point, the Japanese government has to release money in order to get the domestic market going, or else, it will collapse.

This lack of confidence or fear about future is devastating to the economy. This once happened to Korea when it was near national bankruptcy in 1998 during the economic crisis in Asia. People feared for the future and they stopped spending but saving. This had rather devastating effect on the Korean economy. So the government had made up the mind to get help from IMF, the international monetary fund, and cold-heartedly let the lazy banks or companies to go bankrupt. The government has forced many companies and economic figures to reform. The economic reform has resulted in tons of people without jobs, however, Korea managed to get out of the trouble until 2000, which only took them 4 years to overcome the trouble.

Japan, in the other hand, did not take such daring measures to overcome the economic crisis, which started from 1992. As a result, Japan has suffered from two lost decade, and ‘is’ suffering from another losing decade. The Japanese government was not determined like the Korean government so that the economic crisis of Japan has lingered around since 1992, almost 20 years from now.

There is another factor that is aggravating the crisis in a long term. It is the low birth rate. Japan has the birth rate of 7.64 out of 1000 population, which ranks 221th in the world. It was estimated that in 20 or 30 years, there will be 45% of Japanese population with old people over 65. This will reduce governmental income from taxation and aggravate the responsibility the young people have to carry out. Thus, it will have unenthusiastic young people and there will lack of labor in the market. Every economically active young person (at 25-30) will have to take care of 2 elders. This will give disincentive to the young people to get a job. Also, it will discourage the young people not to have babies because it’ll be even more burdensome. Thus, the low birth rate gets worst. The Japanese government has to do something to give incentive for the young people to have babies. Or else, the national will fall into the abyss of low birth rate and ultimately ‘extinction’ of Japanese people.

In sum, the Japanese government has to do something. The Japanese government should first pass a new budget plan in effort to minimize the deficit, and they should pass a new law to encourage young people to have babies. Also, they should get rid of the culture of bureaucracy. Or else, Japan will confront the irremediable problem of bankruptcy.

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US deficit ‘set to hit $1.35tn’

BBC News: Click Here

According to US congress estimates, US budget deficit is expected to reach $1.35 trillion in 2010. “In 2009, the US deficit hit a record $1.4tn – equal to 9.9% of gross domestic product (GDP) – and the highest since the end of World War II.”

I think the reason for this sky-rocketing deficit are the following:

  • an imbalance between revenues and spending that predated the recession
  • sharply lower revenues and higher spending in the recession
  • the costs of various federal policies implemented in response to the global downturn.

This also is what Congressional Budget Office (CBO) said was the reason.

World economy is slowly starting to recover, however, this was possible with borrowing money from banks. It may seem the economy is improving, however, this ‘deficit’ could be an economic bomb if they keep growing. As economy gets better, United States should have a new budget plans keeping the spending lower than the revenue to halt and minimize the deficit.

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