By John Rogers
Part two of a two-part series about how Albion is sharing the liberal arts with Japan, and how Japan is sharing important economic policy lessons with Albion.
As a part of Prof. Yutaka Harada’s visit to learn from Albion’s liberal arts education tradition, he was able to share what Japan is doing to deal with its lack-luster economy.
Harada delivered a lecture entitled Abenomics: Japanese Prime Minister Abe’s New Economic Policy. In his lecture, he detailed Japan’s most recent economic turbulence and what policies Japan’s current prime minister, Shinzo Abe, is implementing to combat the malaise caused by the 2008 global recession. His actions are of particular significance because the global recession was compounded two “lost decades” of Japanese growth, which began with a stock market crash in the early 1990’s.
Popularly referred to as “the three arrows of Abenomics,” the prime minister’s policies, as described by Harada, include a commitment to bold monetary policy, flexible fiscal stimulus (government spending), and structural reforms meant to encourage private investment in the economy.
Prof. Harada explained that, in the past, Japan had an uncoordinated policy response to its stagnation that allowed the economy to go into what economists call a “deflationary tailspin.” This type of self-reinforcing trap happens when prices throughout an economy fall because of a lack of demand. Firms then lower wages, because they cannot afford to pay employees as much, and, in response to lower wages, people spend less, which decreases demand.
Prof. Harada sees, as does Prime Minister Abe, a failure of monetary policy as the main culprit in Japan’s continued battle with deflation. For this reason, Prime Minister Abe’s first arrow is aimed directly at Japan’s central bank.
After the collapse of Lehman Brothers in 2008, a massive shock traveled through the global financial system, which caused lending to consumers and businesses to dry up. Unlike the United States’ and other nations’ central banks, the Bank of Japan did not implement expansionary monetary policy to increase the monetary base and compensate for the lack of loan-able funds and credit available in the economy, as Prof. Harada shows in the chart below.
To counter deflationary pressures, Prime Minister Abe persuaded the Diet, the Japanese parliament, to amend the Bank of Japan Act to, among other things, mandate a two percent annual inflation target. This change should increase monetary policy’s potency, and will have the effect of forcing the Bank of Japan to act more like the U.S. Federal Reserve. Since the early days of the recession, the Fed has had a two percent inflation target, and has more than quadrupled the monetary base in the U.S. since 2008 for which it has been widely applauded.
Harada says that the expansionary monetary policy should have wide-ranging effects, from depreciating the yen and increasing exports to increasing the money that banks have to lend.
“For example, some of the money will end up in the stock market, which will push up prices, making it easier for firms to raise capital that can be invested and used to hire workers. Additionally, households that hold stocks will feel wealthier and spend more, which increases demand,” Harada said.
Though Prof. Harada agrees with Prime Minister Abe’s focus on invigorating monetary policy, he sees the other two arrows of Abenomics, fiscal stimulus and pro-growth structural reforms, as less effective and possibly aimed at targets that are merely ghosts.
Japan has spent the past two decades trying to spend and implement structural reforms to bolster domestic industries to claw its way out of its economic doldrums. These policies have led to the highest levels of public debt in the developed world and to the Japanese government favoring some companies and industries over others.
Such profligate public spending has led to resources being wasted, according to Harada.
“Fiscal stimulus is about providing public goods people value. It cannot work if the money is being spent on roads and bridges people do not drive on, trains people don’t ride on and public halls people do not gather in,” Harada said.
He points to Japan’s historically high investment to GDP ratio relative to other developed countries. Higher rates of investment are traditionally correlated to growth rates. Harada says that the money being spent is not an efficient allocation of resources.
Additionally, Harada alludes to literature, such as research by Prof. David Weinstein of Columbia University, on the adverse effects of governments’ industrial policies that choose winners and losers in private markets. Harada says both policies will have similar inefficient outcomes.
Despite the risks associated with second and third arrows of Abenomics, Prof. Harada is optimistic. With monetary expansion at the top of Prime Minister Abe’s policy remedies, the country will hopefully begin to recover.
Photos via Waseda University and Prof. Yutaka Harada