Japan is caught in a stimulus trap
04/02/2013 Deja un comentario
Japan’s new prime minister, Shinzo Abe, is trying to revive the country’s flagging economy, we could all learn from the exercise. You may recall that, in 1980s, Japan was widely anointed as next economic superpower, displacing the United States. It’s been a long slide since. In the 1990s, the “bubble economy” of high stock and real estate prices burst. The stock market is roughly a quarter of its high. Land prices have tumbled to 1975 levels. Since 2000, economic growth has averaged less than 1% annually. Government debt has ballooned to 214% of the economy (gross national product), about double the level of the most advanced countries. Some superpower. (Robert J. Samuelson – The Washington Post – 04/02/2013)
To get the economy moving, Abe has proposed a “stimulus” package of 10.3 trillion yen ($114 billion), about 2.2% of the gross domestic product (GDP), and pushed the Bank of Japan (BOJ), Japan’s Federal Reserve, to ease credit. This is familiar stuff. For years, Japanese governments have adopted stimulus plans. Since 1995, the budget deficits have averaged 6% of GDP; that’s why debt (all past deficits) has exploded. The BOJ has repeatedly eased credit. In 1999, it cut short-term rates to near zero. It has had two episodes of “quantitative easing”, pumping more money into the economy, one from 2001 to 2006, the other from 2009 to now.
None of this has restored Japan’s glory days. In largest sense, Japan is searching for a new economic model. Until the mid-1980s, it relied on export-led growth. Toyota, Panasonic and other multinationals seemed invincible. Exports and investment in new factories provided the main engine of growth. Unfortunately for Japan, developments in 1980s doomed this model. The yen appreciated on foreign exchange markets, making exports more expensive. And the emergence of other low-cost Asian producers, first South Korea and Taiwan and later Thailand, Malaysia, China, displaced Japan as an export platform. So growth engine slowed. What could replace it? Japan has wrestled with this question for two decades. “Japan’s [economic] dynamism was exaggerated,” says economist Adam Posen of the Peterson Institute. “In the 1980s, people focused on a few great companies and ignored how much of Japanese business was relatively backward.” Japan’s domestic-based businesses (retailing, distribution, food production, health care, among others) have not powered economy the way exports did. Stimulus policies have been the substitute. To combat deep recessions, they’re justified; President Obama’s 2009 stimulus was warranted. But stimulus is supposed to be temporary. It’s supposed to “jump-start economy.” Expansion becomes self-sustaining. In Japan, this transition never really occurred. The longest period of growth (2002-07) depended heavily on a cheap yen revived export model. Richard Katz, editor of Oriental Economist, calculates that about 60% of GDP growth in those years reflected exports and investment tied to exports. This ended with the 2008-09 financial crisis. The lesson is that huge budget deficits and ultra-low interest rates, basics of stimulus, have limits, can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but effect wears off. Economy then needs a new fix. Too many fixes may spawn new problems (excessive debt, asset “bubbles,” inflation). Already happened in Japan.
It’s caught in a trap. On one hand, it needs stimulus to grow. On the other, debt from past stimulus measures threatens future growth. About 95% of government debt is held by Japanese investors, banks, insurance companies and pensions, that have been patient, report economists Takeo Hoshi and Takatoshi Ito. If investors lose patience and balk at buying government debt, the economy could implode. But their patience presumes annual deficits will someday shrink. The trouble is that required tax increases or spending cuts could act as a drag on economy. Already, the Diet has voted to raise consumption tax in 2014 and 2015 from 5% to 10%. Considering this, Japan isn’t attractive place for private investment. A declining population reinforces the effect. Katz of Oriental Economist suggests spurring growth by dismantling protections for sheltered domestic industries. Higher growth would emerge as “the inefficient firms die [and are] replaced by better firms.” Japan’s leaders have generally shunned this complex and contentious approach. Once the present stimulus fades, Katz writes, it’s likely “Japan will fall back to stagnation.” United States isn’t Japan. American economy is more flexible and entrepreneurial. Natural gas and oil boom is a godsend. Housing is reviving. Still, similarities with Japan loom. Growth rates have been stubbornly low. Both rely on stimulus policies, cheap credit, big deficits, to cure problems are fundamentally structural and psychological. Parallels are worrying.