Wednesday, January 23, 2013

Japan steps up reflation efforts

The new Japanese Prime Minister Shinzo Abe’s call for more aggressive action from the Bank of Japan (BoJ) to combat low growth and deflation has been met with an increase in the inflation “goal” of 1.0% to a “target” of 2.0% and the adoption of open-ended quantitative easing.

This move from the BoJ follows the recent announcement from the Government of a fresh fiscal stimulus package of 10.3 trillion yen (US$110 billion) which will be focussed on infrastructure spending and greater disaster preparedness.  The Government’s aim is to boost GDP growth by 2% and create 600,000 new jobs.  We’ll see.
Combating Japan’s economic malaise is complex and the solution requires a multi-faceted approach.  But some areas are constrained.  Fiscal policy can only go so far when fiscal settings and the forward trajectory for public debt are already unsustainable.  But neither can monetary policy fill the void of lack of effort on structural reforms.   

I agree with the BoJs statement that inflation will only move towards a level consistent with price stability as “efforts by a wide range of entities towards strengthening competitiveness and growth potential of Japan’s economy make progress.”  In a joint statement with the BoJ, the Government has committed to formulate measures to boost competitiveness and Japan’s growth potential.  “Those measures include all possible decisive policy actions for reforming the economic structure, such as concentrating resources on innovative research and development, strengthening the foundation for innovation, carrying out bold regulatory and institutional reforms and better utilizing the tax system.”  That all sounds great but it remains to be seen what the Government is actually going to do.

While acknowledging that monetary and fiscal policy can’t do all the heavy lifting, the measures announced yesterday by the BoJ could have gone further.  I’ve previously expressed scepticism that quantitative easing can do much to improve economic growth and labour market outcomes but it can be a powerful tool in combating deflation.  I would have liked to see the BoJ step up the quantum of its asset purchase program.  I like the adoption of a 2% inflation target.  That will be helpful in raising inflation expectations, but that needs to be followed by aggressive action.

Recent developments in Japan are in the right direction, but there’s still a lot to be done. In the meantime I’m happy with my GDP forecasts for calendar 2013 of 1.0%.