Research Institute of Economy, Trade and Industry (RIETI) RIETI BBL Seminar Handout Japan's Abenomics: Reload, Reset or Relaunch? September 27, 216 Speaker: Luc EVERAERT http://www.rieti.go.jp/jp/index.html
Reload, Reset, or Relaunch? Japan s Policy Options Luc Everaert Assistant Director Asia and Pacific Department International Monetary Fund September 216 1
Outline What has Abenomics achieved so far? Why has Abenomics not made more progress? What are the policy options? What are the authorities doing? 2
Abenomics met with some success Reversed undue appreciation of the yen and boosted corporate profits Lifted actual and expected inflation Created modest wage gains and reached full employment Made progress on fiscal consolidation Raised labor force participation and improved corporate governance 1. What has Abenomics achieved so far? 3
But the targets have not been achieved 1. What has Abenomics achieved so far? 4
Current policies will deliver mediocre growth and low inflation Weak growth will persist due to subdued private demand. Contributions to QoQ Growth (SA) (In percent) 3 2 1-1 -2-3 -4 Private inventories Private consumption -5 Net exports Government spending -6 Private gross fixed investment Real growth (q/q) 212Q4 213Q4 214Q4 215Q4 216Q4 217Q4 Source: Haver Analytics..and inflation will remain below target Baseline Inflation Outlook (YoY; in percent) 3. 2.5 2. 1.5 1..5. Headline (y/y) Core (y/y) Inflation Expectations (y/y) 1/ -.5 215Q1 216Q1 217Q1 218Q1 219Q1 22Q1 22Q4 Source: IMF staff estimates. 1/ Average of one-year ahead expectations from Consensus, market based measures and Tankan Survey of firms until 216Q2. Projections assume inflation expectations are based on a weighted average of past and future rates of inflation. Jump in 216Q1-Q2 reflect the effects of the expected consumption tax rate hike in 217. 1. What has Abenomics achieved so far? 5
Public deficits and debt remain high Fiscal deficits are large Putting public debt on an unsustainable trajectory General Government Fiscal Balance (In percent of GDP) 45 37.8 32.4 34.9 3 3.7 21.1 19.8 45 3 Japan: Gross Public Debt 1/ and Fiscal Balance (In percent of GDP) 4 Gross debt (RHS) 2 Fiscal balance (LHS) -2 3 25 15 Balance Expenditure Total revenue Tax revenue 15-4 -6-8 -1 2-15 -15 199 1995 2 25 21 215 221 Sources: IMF WEO database; and IMF staff estimates. -12 15 25 21 215 22 225 23 Sources: Cabinet Office; and staff estimates and projections. 1/ Gross debt of the general government including the social security fund. Withdrawal of fiscal stimulus and consumption tax increases to 1 percent in October 219 are assumed. 1. What has Abenomics achieved so far? 6
Headwinds, structural obstacles and limits to policy effectiveness 2. Why has Abenomics not made more progress? 7
Global weakness depressed exports and lowered inflation Global trade slowdown has offset benefits from currency depreciation while...falling commodity prices have failed to boost activity and put downward pressure on inflation Real Exports and REER (212 Oct=1) 12 11 1 9 World Oil Price and Japan Inflation (In percent; YoY) 2 1-1 -2 WEO Oil Price Headline Inflation w/o VAT effect (RHS) 2. 1.5 1..5 8-3. -4 7 Real exports REER -5 -.5 6 Jul-1 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Source: Haver Analytics. -6 212Q1 213Q2 214Q3 215Q4 Sources: World Economic Outlook; and IMF Staff Calculations. -1. 216Q2 2. Why has Abenomics not made more progress? 8
Developments in financial and external conditions complicate the short-term Financial conditions have tightened recently.and the yen has appreciated strongly since end of 215 Japan: Financial Condition Index and Credit Cycle 6 5 Financial condition index 1/ Tighter 4 Credit cycle 2/ 3 2 1-1 -2-3 1998Q1 22Q4 27Q3 212Q2 216Q2 Sources: Bank of Japan; Ministry of Finance; Haver Analytics; and IMF staff estimates. 1/ Estimated as the first principal component of (standardized) 3-month TIBOR, 1-year JGB yield, stock price, and NEER. 2/ Estimated as the average of the HP-filtered real total credit growth (deflated by CPI) and total credit-to-gdp ratio. 2. Why has Abenomics not made more progress? Japan Exchange Rate Movements 13 125 12 115 11 15 1 Yen noncommercial traders' net long-positions (USD bn; RHS) Exchange rate (Yen/Dollar) VIX (1941-43=1; RHS) 5 95 8/17/215 11/5/215 1/24/216 4/13/216 7/2/216 Sources: Bloomberg, L.P.; and IMF staff calculations. 4 3 2 1-1 9/14/216 9
Structural impediments are weighing on growth and wages Demographic headwinds are lowering potential growth and labor market duality is preventing wage growth Potential Growth (percent) 2 Capital Employment Hours TFP Potential Growth Rate 1.5 1.5 Nonregular Workers and Wage Growth (YoY; in percent) 3 2 1-1 -2 Change in full-time wages Composition effect Changes in part-time wages Share of nonregular workers (right side) 1/ (In percent of staff) 37 35 33 31 29 -.5-1 2 23 26 29 212 215 218 221 224 227 23-3 27 22Q2 24Q2 26Q2 28Q2 21Q2 212Q2 214Q2 216Q2 Sources: Haver Analytics; and IMF staff estimates. 1/ Yearly Average. 2. Why has Abenomics not made more progress? 1
Profits are accumulating and the labor market is increasingly tight Profits are accumulating in corporate cash holdings And there are more vacancies than job applicants Vacancy Rate and Ratio of Job Openings to Applicants (In percent, ratio) 4 3.5 3 2.5 2 1.5 1.5 Vacancy Rate Ratio of Job Job Openings to Applicants (RHS) 2. 1.8 1.6 1.4 1.2 1..8.6.4.2. 197Q1 1977Q1 1984Q1 1991Q1 1998Q1 25Q1 212Q1 216Q2 Source: Haver Analytics. 2. Why has Abenomics not made more progress? 11
Aging is dampening inflation and growth Declining neutral rate reduces monetary policy effectiveness Japan: Natural Rate of Interest (In percent) 4 3.5 Actual 3 2.5 Natural rate of interest 2 1.5 1.5 -.5-1 -1.5 1986Q2 1991Q2 1996Q2 21Q2 26Q2 211Q2 216Q2 Sources: Bank of Japan; Haver Analytics; and Fund staff estimates. Note: The blue line is the actual real discount rate deflated by the inflation expectations estimated from an MA(4) model, and the red line marks the mean posterior estimates of the natural rate of interest from a Bayesian time-varying parameter vector autoregression (TVP-VAR) model following Lubik and Matthes (215). The shadow areas highlight the recession periods (defined as when the SAAR real GDP growth falls below zero for at least two consecutive quarters). Aging reduces productivity growth Labor Total factor productivity productivity Old age -.851** -1.157** Dependency (.338) (.664) Net migration.724* 2.491*** (.361) (.691) Lagged -.632.883** Population growth (.199) (.47) Control variables Yes Yes Lagged dependent Yes Yes Time dummy Yes Yes Observations 138 138 R squared.643.585 Robust standard errors in parenthesis *** p<.1; ** p<.5; * p<.1 2. Why has Abenomics not made more progress? 12
Monetary policy has been losing traction Loan growth has stalled, getting little help from NIRP and markets are no longer impressed FX market reaction on the day of BoJ meetings (Yen/U.S. Dollar exchange rate, percent change) 3. 2. 1.. -1. -2. Appreciation -3. -4. January 29 March 15 April 28 June 15 July 28 Source: Haver 2. Why has Abenomics not made more progress? 13
Fiscal policy is contributing to uncertainty Stop-go nature of fiscal policy contributes to policy uncertainty With adverse effects on investment and consumption 2. Why has Abenomics not made more progress? 14
Japan is at a Fork in the Road 3. What are the policy options? 15
Three alternative policy packages Under current policies all targets remain out of reach within the timeframe set by the authorities Comprehensive policy reload to reach targets under current time-frames Reset of targets and policies to prepare for the long haul Relaunch policies with further unorthodox measures? 3. What are the policy options? 16
Option 1: Reload package Higher incomes and wages with labor contract reform Fiscal and monetary policies for demand support Improved medium-term fiscal and monetary policy frameworks Accelerated structural reforms 3. What are the policy options? 17
Income policies to spur and coordinate wage-price dynamics Real wage growth Wage growth has lagged productivity growth Real wage and productivity growth (In percent, 1992-214) 1.6 1.4 1.2 1..8.6.4.2. -.2..5 1. 1.5 2. Labor productivity growth Sources: OECD, and IMF staff calculations. 3. What are the policy options? Comply or explain mechanism would help spur private wage growth Different Measures of Earnings (4 quarter MA of total earnings, 27=1) 14 12 1 98 96 94 92 9 88 Total Earnings (per full-time employee) Total Earnings (per half-time employee) Contractual Earnings (per employee) 86 27Q1 29Q1 211Q1 213Q1 215Q1 216Q2 Sources: Haver and IMF staff calculations 18
Fiscal expansion to close output gap but with preannounced consolidation Steady and gradual on the consumption tax Mind the rising gap in social security Consumption Tax Hike: Deviation in Growth from Baseline (In percentage point).1 -.1 -.2 -.3 -.4 -.5 -.6 -.7 -.8 -.9 (i) 5-stage:.5 percent of GDP increase each in year 1-5 (announced in year 1) (ii) 2-stage (pre-announced): 1 percent of GDP increase in year 1 and 1.5 percent of GDP in year 4 (both announced in year 1) (iii) 2-stage (ad hoc): same as in (ii) except that the second tax increase is announced in year 4 year 1 2 3 4 5 6 7 8 Source: IMF staff estimates. Social Security Benefits and Contributions (In percent of GDP) 25 Other Elderly care Health care 2 Pensions Total social security contributions Total social security benefits 15 1 5 FY199 FY1995 FY2 FY25 FY21 Sources: National Institute of Population and Social Security Research. 25 2 15 1 5 FY213 3. What are the policy options? 19
Continued monetary accommodation with improvements to the framework Reverse downward drift of inflation expectations Share of households with one year ahead inflation expectation 1 9 8 7 6 5 4 3 2 1 5% ~ 2% ~ 5% % ~ 2% % -2% ~ % -5% ~ -2% ~ -5% Strengthen communication and clarify guidance: Move away from a prespecified time horizon for meeting targets Clarify which inflation measures drive policy Publish a staff baseline forecast together with underlying policy assumptions Discuss alternative scenarios Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Source: Cabinet Office. 3. What are the policy options? 2
More structural reforms to boost wage pressure and potential growth Restore wage bargaining power Boost labor supply (female, older, foreign) and deregulate Potential Impact of Path-Breaking Structural Reforms (Potential growth; Illustrative) 1.5.6.4 Corporate governance reform (See IMF WPs by 1 Aoyagi and Ganelli, 214; Galen, 214) Financial sector reforms that raise risk capital as well as SMEs restructuring (Peterson Institute, 212) TPP (Peterson Institute, 212) 8 6 4 2 Product market reform (SEZs, Agricultural, Electricity) Gains from ending deflation Reducing labor duality (See Aoyagi and Ganelli, IMF WP, 213) Foreign labor (See IMF 213 Art IV) Female labor participation (See OECD, 215 forthcoming) Potential Impacts (cumulative) 3. What are the policy options? 21
Option 2: Resetting targets and policies 3. What are the policy options? 22
Monetary policy: easy for longer while minding stability risks Limited monetary policy room... Share of JGB holdings by the Bank of Japan 1/ (In percent) 8 7 6 5 4 3 2 1 Oct. 211 Oct. 212 Oct. 214 Dec. 219-QQE2 9.% 12.1% Dec. 219-QQE 22.3% 6 65 7 75 8 85 9 95 1 15 Outstanding JGBs Note: 1/ Uses deficit projections to forecast outstanding amount of JGBs (size of the bubble). Source: IMF staff calculations. QQE-2 QQE 61.1% 45.6% with lurking risks to financial stability Inter-dealer Monthly Transaction Volume 1/2/ 1 2 9 8 Monthly transaction volume (In trillion yen, LHS) Turnover ratio (In percent, RHS) 18 16 7 14 6 12 5 1 4 8 3 6 2 4 1 2 Mar-5 Nov-6 Jul-8 Mar-1 Nov-11 Jul-13 Mar-15 Mar-16 Sources: Japan Securities Dealers Association; Ministry of Finance. 1/ Treasury Discount Bills, etc. are excluded from transaction volume. 2/"Turnover ratio" is calculated by dividing the transaction volume by the outstanding amount. 3. What are the policy options? 23
Fiscal: steady and gradual consolidation for longer Moving the Philips curve may exhaust fiscal space and risk fiscal confidence shocks Phillips Curve CPI all items less food and energy w/o VAT effect ( YoY) 4 3 2 1-1 A: 83Q1-95Q4 B: 96Q1-12Q3 y=.3x+2 y=.1x-.2 C: 12Q4-16Q2 y=.2x+.5-2 -1-5 5 Output Gap Sources: Cabinet Office; Bank of Japan; and IMF staff estimates. Public Debt Financing in the Baseline (In trillion yen; end of period) 18 16 14 12 1 8 6 4 2 BOJ-long depository institutions GG overseas financing needs BOJ-short insurance/pension funds others excess reserves at BoJ's CA 215 216 217 218 219 22 221 222 223 224 225 Sources: Flow of Funds (BoJ); and IMF staff estimates. Note: Includes both central and local governments' debt (including FLIP bonds). The BoJ is assumed to stop increasing its JGB holdings under QQE2 at end-217. 1,8 1,6 1,4 1,2 1, 8 6 4 2 3. What are the policy options? 24
Option 3: Re-launch unorthodox policies 3. What are the policy options? 25
Risky business: net government debt in different scenarios (percent of GDP) Reload package Krugman fiscal expansion Svensson exchange rate target Turner monetization 3. What are the policy options? 26
Risk-return trade-off remains so far in favor of a comprehensive, balanced package 3. What are the policy options? 27
Where do policies stand? Incomes policy and contract reform Fiscal Policy Done -Minimum wage increases -Tax incentives for private wage increases Near term stimulus To do -Private sector wage hikes through comply/explain -Larger tax incentives (and penalties if needed) -Public sector wage increases -Contract reform -Credible medium-term framework with gradual consumption tax hikes -Independent macroeconomic and budget projections Monetary Policy Structural reforms -Accommodative stance -More sustainable framework -Child and nursing care reform -Corporate governance reform 4. What are the authorities doing? Strengthen communication framework and clarify guidance -Labor supply measures for women, older, and foreigners -Productivity enhancing deregulation -Capital deepening 28
Thank You! 29
References IMF Staff Report for the 216 Article IV Consultation with Japan: http://www.imf.org/external/pubs/ft/scr/216/cr16267.pdf Selected Issues (analytical work by the IMF Japan team): http://www.imf.org/external/pubs/cat/longres.aspx?sk=44159. How to Reload Abenomics, IMF News Article: http://www.imf.org/en/news/articles/216/8/2/13//na8216- How-to-Reload-Abenomics IMF blog on Japan: Time to Load a Fourth Arrow-Wage Increases : https://blog-imfdirect.imf.org/216/3/13/japan-time-to-load-afourth-arrow-wage-increases/ Davide Porcellachia Wage-price dynamics and structural reforms in Japan WP16/2 http://www.imf.org/external/pubs/cat/longres.aspx?sk=43693. George Kopits The Case for an Independent Fiscal Institution in Japan WP16/156 http://www.imf.org/external/pubs/cat/longres.aspx?sk=44161. Arbatli, Botman et. al. Reflating Japan: Time to Get Unconventional? WP16/157 http://www.imf.org/external/pubs/cat/longres.aspx?sk=44162. Ikuo Saito Fading Ricardian Equivalence in Ageing Japan WP forthcoming 3