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Will ‘Abenomics’ Save the Japanese Economy?

Abenomics

アベノミクス: Abenomics in Japanese

PDF File: “Will ‘Abenomics’ Save the Japanese Economy?” by Kim Sang Keun

I. Introduction

Ever since Shinzo Abe came to power, the Japanese government led by LDP has vowed to revive the stagnant economy by implementing bold economic policies. In effort to overcome so-called ‘Lost Decades,’ which has deteriorated the ego of many Japanese people, Abe has announced three simple economic policies that earned the name ‘Abenomics’ after its proposer. This includes indefinite quantitative easing, flexible public finance policy and economic growth strategy.[8] In this paper, we will look at the economic logic behind the Abenomics and problems and risks associated with it.

II. Economic Logic Behind Abenomics

Through Abenomics, the Japanese government hopes to revive its economy by implementing bold, powerful economic policies that will pull its economy out of deflation, depreciate Japanese yen, and induce CPI inflation rate of 2% per year. The Japanese government saw the constant decline of overall price level by lack of aggregate demand as the main culprit of the long-term recession that its country was going through.[3] In order to ‘reflate’ its economy, Abenomics tries to implement quantitative easing, fiscal policy through expanding government spending, and provide economic growth strategy. We will first look at the quantitative easing and its economic theory behind what the Abenomics is trying to achieve.

For analyzing the economic theory of Abenomics, the Mundell-Fleming Model for a large open economy was used in this paper as the main model. The following are the IS-LM equations for the model:

IS: Y = C(Y-T) + I(r) + G + NX(e)

LM: M/P = L(r,Y)

Notice that the assumption of r = r* was dropped, which is an equation for a small economy that cannot influence the world interest rate. As Japan is the third largest economy in the world, the assumption that it has little influence on the world financial market had to be dropped. Therefore, the interest rate was treated as an endogenous variable. As a result, LM curve got a positive slope, instead of being vertical.

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First of all, the Bank of Japan is targeting a 2% CPI inflation rate and increasing the money supply circulating in the economy by buying various financial assets such as the government bond, which is essentially monetary expansion policy.[3] It could be said that this indefinite quantitative easing is the core of Abenomics. On the graph above, the increase in the money supply shifts the LM curve to the right, raising the income from Y1 to Y2, and lowering the real interest rate from r1 to r2. The decrease in the real interest rate then increases the net capital outflow as is illustrated on the second graph.

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As the net capital outflow increases from CF1 to CF2, the supply of Japanese yen in the market for foreign exchange increases. The exchange rate falls from e1 to e2, depreciating the Japanese yen. This makes the Japanese goods relatively cheaper to foreign goods and the net export rises from NX1 to NX2. There are two channels for this mechanism. First, as the monetary expansion lowers the interest rate, this stimulates the investment. Second, as the monetary policy causes the currency to depreciate in the market for foreign exchange, this stimulates net exports.

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All in all, the Abenomics tries to devaluate its allegedly over-appreciated yen and cause an inflation rate of 2% as the output increases. As a result, the Japanese yen has depreciated until the 103.42 (JPY/USD) recently on May 22nd. This is the lowest in almost 6 years, ever since the Global Financial Crisis that hit the economy around the world in 2007. This is shown in the exchange rate graph above.

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Secondly, the Japanese government is trying to initiate fiscal policy by expanding government expenditures. As the government implements fiscal expansionary policies the IS curve shifts to the right. As the graph above illustrates, this shift in the IS curve leads to an increase in the level of income from Y1 to Y2 and an increase in the interest rate from r1 to r2. The increase in the real interest rate reduces the net capital outflow from CF1 to CF2.

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As the net capital flow falls, the supply of Japanese yen in the market for foreign exchange falls. This induces the exchange rate to appreciate from e1 to e2, which decreases the net export from NX1 to NX2 as the Japanese goods become more expensive relative to foreign goods.

As the graph illustrates, the fiscal expansion by Abenomics will raise the income and output for the Japanese economy. However, it is to be pointed out that although implementing both the fiscal and monetary expansionary policies will increase the output of the Japanese economy, the effect on the exchange rate is conflicting. Yet, this problem is accounted for as the Japanese government will set its ‘desirable’ exchange rate, possibly above 100 JPY/USD, and fix it so that other variables can freely adjust, although it might compromise some of the output to some degree. Or if the Japanese government considers the increase in the economic output, and therefore the inflation rate, more important over the exchange rate, it might decide to compromise fixating the exchange rate to their ‘desired’ level for the economic growth.

Thirdly, on June 5th, the Japanese government announced the third policy for Abenomics, which includes economic growth strategy. The government announced plans for bringing up the financial integrity of Japan, however, there were no significant policies that were announced.

III. Problems and Risks Associated with Abenomics

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There is a rising skepticism towards whether Abenomics would really revitalize the Japanese economy as the exchange rate appreciated breaking the 100 JPY/USD boundary and as Nikkei Index crashed. Although, theoretically, Abenomics has a sound Keynesian background, many are pointing out the fact that it is too focused on the demand side of its economy, not on the supply side.

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Japanese Demography Data[11]

One of the fundamental problems that Japan is facing is its ageing population. As the population pyramid gets inverted, the labor population is shrinking every year. This brings about number of problems for the Japanese economy. First, the government commitment in spending on pensions, medical expenses and social security will continually act as a substantial burden to the already indebted country with a public debt of 240% its GDP.[11] This will further worsen the financial integrity of the Japanese government leading to an erosion of international confidence in Japanese economy. The lack of confidence can raise the risk premium (CDS) shifting the IS* curve to the left and LM* curve to the right, as θ increases for r = r* + θ. But, the exchange rate would depreciate more than what is desired by the Japanese economy, and it would force the Bank of Japan to decrease the money supply in order to bring up the yen value, shifting the LM* curve back to the left. This would aggravate the situation and lower the total income in the Japanese economy. This then would induce the interest rates to depress the prices of financial assets, which will then reduce the collateral being used as bank loans. As a result, this will lead to financial problems for Japan, further exacerbating the problems. Secondly, its dwindling workforce cannot sustain the economic output level that is maintained in the future.[11] As it is shown on the data, the demography will drastically change so that more young people will have to support for the older population, which implies that this change in demography is the main culprit for the last two decades of deflation and stagnant economic growth.[11] This has another implication to why the consumer demand might be falling behind.

In this sense, it could be said that Abenomics is failing to address the core problem of its economy. It must ask why consumer demand is inherently weak. Another major reason why the Japanese economy is stagnating is the poor productivity. This may sound strange to many people as Japan was once praised as technologically advanced country. However, according to the statistic, Japanese productivity lags badly behind world’s leading countries in many areas. For example, it lags 30% behind the U.S. in manufacturing with automobiles industry in exception.[9] Therefore, corporate reforms are needed in order to let inefficient firms downsize or die and be replaced to better ones.[9] In the case of Korea, as it suffered trough the so-called IMF Crisis in 1997, it underwent painstaking corporate reforms to let the inefficient firms die and raise the overall competitiveness of its economy. So it is doing relatively fine in terms of corporate competitiveness and financial integrity compared to Japan, although this is shaking a little due to Abenomics.

What is problematic right now is that the third policy for Abenomics lacks fundamental and specific content, which started to give erode out public confidence in Abenomics. As it was mentioned, this resulted in the crash of Nikkei Index and the re-appreciation of Japanese yen, breaking the 100 JPY/USD boundary. Shinzo Abe, afraid of losing the votes, has put aside the painstaking reforms to later, such as corporate tax cuts that will improve the productivity of Japanese firms. There was a discussion within the Japanese government in cutting the corporate taxes from 30% to 20% and to implement new policies that will make the labor market flexible.[5] However, flexible labor policy means temporary job losses[11], and it seems that Shinzo Abe is putting these essential reforms after the Japanese upper house elections. This could erode out confidence in Abenomics losing its force towards reviving the economy.

There is another risk associated with Abenomics. As the yen depreciates, net export increases as domestic products gets cheaper abroad, however, imports get more expensive. This is a big problem for Japan as ever since the Fukushima nuclear disaster, the word ‘energy crisis’ was lingering around the Japanese newspapers for two years. As Japanese public refused to use nuclear power, the Japanese government had to turn to more expensive imported energy, such as LPG, oil and naphtha, increasing the monthly value of Japanese energy imports from 1.4 trillion yen to 2.2 trillion yen.[12] This could deteriorate the competitiveness of Japanese companies, as energy prices go up. In addition, export accounts for only about 14% of its economy.[1] So the core of Abenomics should be in order to revive the domestic economy, not through export. The increase in energy prices could raise the domestic consumer prices without actually improving the income of the Japanese firms and consumers. Therefore, there is a risk towards Abenomics in that expensive energy imports will drag the Japanese economy into another lost decade.

IV. Conclusion

In conclusion, Abenomics is a sound Keynesian policy that could save the Japanese economy from deflation. The Mundell-Fleming Model was used to illustrate the economic theory behind Abenomics. However, there were considerable risks associated with Abenomics, such as the ageing population, poor productivity and the energy crisis. The key to success for Abenomics would be dependent on whether the Japanese government effectively manages these risks and confronts the fundamental reforms that would improve the supply side of its economy.

Reference

1. 박영철, 아베노믹스 실패 가능성 높다, <주간조선>, 2013.03.18, http://weekly.chosun.com/client/news/viw.asp?nNewsNumb=002248100014&ctcd=C05

2. 박형준, 日 환율-주가-금리 3각 부메랑… 아베노믹스 두달만에 휘청, <동아일보>, 2013.06.05, http://news.donga.com/3/all/20130605/55643597/1

3. 이형근, 아베노믹스, 디플레이션 탈출과 엔고 시정 추진, 2013년, 평화문제연구소, 통일한국 제352호, pg34-35, http://www.dbpia.co.kr/Article/3129836

4. 정성춘, 이형근, 서영경, 일본 아베노믹스의 추진 현황과 정책 시사점, 2013년, 대외경제정책연구원, 오늘의 세계경제, Vol. 13, No. 5

5. 차학봉, 아베노믹스 세 번째 화살 ‘不發’, <조선일보>, 2013.06.06, http://news.chosun.com/site/data/html_dir/2013/06/06/2013060600263.html

6. 한영기, 아베노믹스의 효과 및 과제, 2013년, 한국은행 동경사무소

7. 한창만, 아베노믹스 ‘거꾸로 효과’, <한국일보>, 2013.02.20, http://news.hankooki.com/ArticleView/ArticleView.php?url=world/201302/h2013022021083122510.htm&ver=v002

8. Adams, W. J. (2013). Japan: Assessing the Future of Abenomics, The Boston Company, http://www.thebostoncompany.com/assets/pdf/views-insights/April13_Views_Insights_Future_of_Abenomics.pdf

9. Katz, R. (2013). Abenomics Is Bad Medicine, The Wall Street Journal, http://online.wsj.com/article/SB10001424127887324590904578287472450294546.html

10. Mankiw, N. G. (2013). Macroeconomics Eighth Edition, Macmillian

11. McNerney, G. J. (2013). Will ‘Abenomics’ Ensure Japan’s Revival?, Thomas White International, http://www.thomaswhite.com/pdf/Will-Abenomics-Ensure-Japans-Revival.pdf

12. Schaede, U. (2013). Abenomics cannot succeed without cheap nuclear power, The Japan Times, http://www.japantimes.co.jp/opinion/2013/06/05/commentary/abenomics-cannot-succeed-without-cheap-nuclear-power/#.UbFlP-uPJBy

Data

13. St. Louis Economic Research: http://research.stlouisfed.org/fred2/graph/?id=DEXJPUS

14. Naver금융: http://info.finance.naver.com/marketindex/worldExchangeDetail.nhn?marketindexCd=FX_USDJPY

15. Naver금융: http://finance.naver.com/world/sise.nhn?symbol=NII@NI225#

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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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US dollar falls to 14-year low against the yen

BBC News: Click Here

“The US dollar has hit a 14-year low against the Japanese yen with low interest rates in the US making the greenback less attractive to investors.”

According to BBC News, the US dollar has slipped to 86.5 yen. It seemed to have lost its name as ‘world currency.’ With low interest rates and unstable economy within the US, the investors are ditching the US dollars and finidng an alternative (such as Euro, Yen, or gold). This has significantly affected the US dollar to fall. Investors wanted safe, high-profit currency; not low-profit, unstable US Dollar.

While the US Dollar slipped to 86.5 yen, other currencies such as Euro, Yen, or gold have increased dramatically. The price of gold was especially surprising. The price of gold was steadly rising for last 5 years! This significantly increased especially during the last 2 years when there was a global economic recession. Investors wanted more safe investments. So they chose gold.

Yet, I do not think the fall in US dollar is a bad news for US automobile companies or export companies. As the value of US dollar compared to other major currencies has fallen, the exporting companies have gained price advantage over other companies in the country with high currency. Also this will allow companies in the US to gain more control of the domestic market as other companies based on the country with high currency compared to the US dollar will lose a price advantage.

<A terrified Japanese man reluctantly trading US dollars for Japanese Yen>

Japanese exporting companies would be seriously concerned about this situation. As 40% of its economy is based on exporting, it is a serious matter related to the recovery of economic downfall in Japan.

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Currency Wars by Song Hongbing

화폐전쟁

<Picture: Chinese Book & Korean Translated Book>

Recently I have read a book called Currency Wars written by a Chinese economist Song Hongbing. I first want to say that this book is filled with conspiracy theories and nationalistic ideas. However, the writer has given specific data and reasoning to support his ‘conspiracies’. Therefore I think the book should be called a ‘faction’ book as it is based on truth, however, dramatized too much.

This book overall ‘reveals’ the conspiracy of colossal finance corporations and how they use currency as an instrument of exploiting wealth of people. The book has some of the shocking comments such as ‘Bill Gates isn’t the richest man in the world’ and ‘huge finance corporations are responsible for wars around the world.’ Also, the book raised one’s consciousness about how currency as a weapon can be more destructive than physical weapons.

Rothschild Family:

First of all, the book reveals that the Rothschild family is the richest family with $5 trillion dollars whereas Bill Gates “only” have $40 billion dollars. The Rothschild family’s wealth is 100times the Bill Gate’s wealth. How has this family earned exponential amount of money, and how hasn’t no one noticed about it? This is the mysterious question the author asks. The author then answers that the family’s strict control, accumulated experience in markets, and their endless desire in making ‘financial empire’ across the world made it possible for them to be the richest family in the world. Actually, this family has accumulated its wealth well before 200 years ago starting from England.

The rise of Rothschild family begins in 1815 when the Battle of Waterloo between England and France ignited. At the time, Rothschild family was devoting to bank management. They had international banks around Europe such as Germany, France, and England. The family had vast network of industrial spying agency. Therefore, the Rothschilds had an efficient network for market informations.

<Battle of Waterloo>

When the Battle of Waterloo began, the Rothschilds instantaneously realized that they will earn tremendous amount of money. Many people were betting their whole wealth by buying national bonds of either England or France. If England loses the battle, the national bonds will be worthless. Conversely, if France loses this battle, the price of French national bonds will fall dramatically. Therefore many people were betting their fortunes on the Battle of Waterloo.

At the time, it took days for troops to either report a victory or defeat to the government simply because there weren’t any cars or other efficient means of transportation. The Rothschilds family, using their vast spy network, succeeded in finding out the result of the battle, one day faster than the government. When the Rothschilds family found out that the British has won the battle, Nathan Rothschild (the family’s third son) immediately headed to the stock exchange of England.

Everyone was nervous in the appearance of Nathan Rothschild in the stock exchange. Nathan ordered his agents to sell tremendous amount of British stocks. He ordered one of his agents to shout out false information, “Rothschilds found it out! The British has lost to the French.” People, terrified, struggled to sell their stocks before the price got any lower. The stocks exchange was in chaos. In a minute, the price of national stocks fell to 5% of their original value. The stocks became a worthless piece of paper in a minute. Nathan Rothschild then immediately told his agents to buy all of the stocks.

This was a victory for Rothschild’s family. British government was also victorious in the Battle of Waterloo, however, in a long run they were losers. As Rothschild family seized all of the stocks in England, they seized the right of Bank of England. The family then forced the British government to pay their loan (for a long battle) by tax. So the family was successful in seizing the rights of imposition of taxes.

<The Bank of England>

By seizing the Bank of England, the family of Rothschild exercised power and dominance by controlling the supply of currency. Here are the quotes relating to the dominance of currency.

  • “Money is Power”, or shall we say, “The Monopoly to Create Credit Money and charge interest is Absolute Power”. (Alex James)
  • “Let me issue and control a Nation’s money and I care not who makes its laws”. (Amsel Rothschild)

Like Amsel Rothschild what said, Rothschilds used currency as a mean of exploiting wealth from people with out being noticed.

In the past, gold was used as a mean of currency. Gold has a limited amount of money, and it was perfect in serving as a currency. However, as ‘paper’ currencies came out, it was possible to make infinite amount of money. If you know the common sense of finance, the infinite supplying of currency will cause an inflation. For example, if a person named John has one dollar, it would not worth a dollar after the inflation. As a result, Jon will lose sums of his wealth. Rothschilds used this method in order to exploit wealth from people. They increased the supply of money in order to decrease the wealth of people. Once it has decreased its price, Rothschilds bought the wealth away from people. After they have bought such things as stocks from people, the Rothschilds limited the supply of money. This caused deflation and increased in value or worth of currency. As a result, Rothschilds increased their wealth to tremendous amount.

  • Satirical cartoon protesting against the introduction of paper money, by James Gillray, 1797.

Later on, the Rothschilds used these kinds of methods to manipulate the stocks and gained wealth. They also stirred wars around the world to make profit.

In conclusion, Rothschilds expanded their financial empire by dominating national banks around the world such as Federal Reserves of United States, and etc. Rothschilds with other huge financial corporations caused many economic depressions such as the Japan’s lost decades and 1997 Asian Financial Crisis that affected Korea, Thailand, Malaysia, and etc.

On its rest of the pages, the book illustrated about how finance and currencies operate. Also, it deals with the problem of paper notes as a currency. It also deals with the problem that paper currencies creates problem such as debt being larger than the actual amount of money due to debenture of ‘money earned in the future’.

Through out the book, I did not (or tried not to) believe the claims stated in the book. I knew that some of the stories have been too much dramatized. However, I feared in a sense that this could be a reality because the writer Song Hongbing has given out specific data through out the book, which supporting his claims strongly.

In sum, it was too complicated for a high school student to understand the functionality of currency and finance in the book, however, I think I understood most of the important aspects of currency.

Related Resources:

Article: “Chinese buy into currency war plot”

Wikipedia: Rothschild Family

Wikipedia: Currency Wars

Wikipedia: Fiat Money

2010.5.21 Writer’s Comment

I think that we should not ‘mindlessly’ believe what is written in this book. It’s full of conspiracies, however, the author has given us different point of view and perspectives to how some people think of economics. Majority of the people used to think of economics as a subject of ‘how to earn money.’ But, Song Hongbing introduced us the new perspective of how the economy can be dominated in the way it is described in the book. Remember, it is not entirely comprised of ‘facts.’ Many of the ‘theories’ are based on the ‘reasonable’ assumptions.

2010.10.4 Writer’s Comment

I must admit that comparing the wealth of a family (multiple individuals) and the wealth of ‘an’ individual is somewhat awkward. There could be hundreds of individuals in one family. Therefore, it could be possible that the book was wrong about how Bill Gates is not the richest man in the world. However, doing simple math it could be easily known that there are individuals within the Rothschild family that has more wealth than Bill Gates. For example, 5000billion divided by 100 would equal to 50billion. This would mean that 100 individuals have more wealth than what Bill Gates has (40billion). However, the wealth would not be distributed equally like equal slices of pizzas. The distribution of the wealth within the family will be concentrated in the middle and it disperses to other individuals. So there will be about 10 individuals with 50% of the $4 trillion.

However, I really don’t believe in what the book is saying. I still believe that Bill Gates is the richest man in the world. I’ve just done some calculations to see if it is ‘legitimate’ to compare a group of people to an individual.

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