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.
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%.