Abenomics: From Stimulus to Sustainable Growth Jerry Schiff Deputy Director Asia and Pacific Department International Monetary Fund
Abenomics: from where to where? What is the right benchmark? Recovery, Fiscal sustainability Fiscal policy (stimulus, consumption tax) Initiates recovery, growth becomes self-sustained. Over time deficit and debt ratio decline Inflation Monetary policy (2 percent inflation, QQME) Growth reforms (TPP, Diet session) Inflation expectations rise, portfolio rebalancing picks up, core inflation starts rising Investment recovery, employment and wages rise, labor supply and productivity increase Higher growth Where are we? What s next?
Recovery on track? Growth has accelerated, but mainly reflects monetary and fiscal stimulus Components of Real GDP (Index, 212Q4=1) 18 16 Public spending Jan-Mar 13 Apr-Jul 13 Private consumption Corporate investment Exports 18 16 14 14 12 12 1 1 98 98 96 12Q4 13Q1 13Q2 12Q4 13Q1 13Q2 12Q4 13Q1 13Q2 12Q4 13Q1 13Q2 96 Pre-Abe (Oct 212 WEO) Abenomics
Recovery on track? Recent indicators are broadly positive Economic developments since Abenomics (level, Dec 212=1) Notes: Jan April 213; May 213 latest available data
Progress on Inflation? Inflation has been rising steadily, but mainly a result of higher import costs Year-on-Year Inflation (In percent) 1 Headline.5 Core (ex. food & energy) 1.5 Core Core-CPI Index (SA): Key Inputs (Relative weights in parenthesis) 13 12 Housing (31.3%) Transportation & communication (21.%) Reading & recreation (16.9%) 13 12 11 11 1 1 -.5 -.5 99 99-1 -1 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Sources: CEIC database; and IMF staff estimates. 98 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 98
Progress on Inflation? Inflation expectations have risen but remain below the BoJ target Inflation Expectations (In percent, year-on-year) 2.5 2 Short-term (1-2 Yr) \1 Medium-term (3-6 Yr) \1 1.5 Break-even inflation (5 Yr) 1 2.5 2 1.5 1 Consensus forecasts: Japan GDP growth (Annual growth rate, in percent) 2.5 Forecast date: 2 1.5 Oct 12 Apr 13 Oct 13.5.5 1.5 -.5-1 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Source: Bloomberg. 1/ Expectations based on inflation swaps bid and ask prices. -.5-1 -.5 213 214 215 216 217 218 Source: Consensus Economics
Transition to sustained recovery? Despite tightening in the labor market, wages have not yet begun to rise Labor Market 12 Vacancy/applicant rate (lhs) 115 Earnings (rhs) 14 13 Cash Earnings (All industry, SA) 114 11 Scheduled earnings Overtime earnings Bonuses & other earns 114 11 11 12 16 16 12 12 15 11 98 98 1 1 94 94 95 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 99 9 Jun-212 Sep-212 Dec-212 Mar-213 Jun-213 Sep-213 9
Transition to sustained recovery? Investment has picked up but needs to be sustained and broadened Private Investment in Plant and Equipment (In percent, QoQ, SAAR) 6 6 4 2 All Industries Manufacturing Non Manufacturing 4 2-2 -2-4 -4-6 -6-8 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sources: MoF via CEIC -8
Transition to sustained recovery? Portfolio rebalancing has so far been limited Banks Assets 22 16 JGB Holdings of Japanese Banks (In percent of total assets) 3% 3% 2 Reserves at BoJ (LHS) 15 City Banks 18 Loans (RHS) 14 25% Regional Banks 25% 16 13 14 12 2% 2% 12 11 1 1 15% 15% 8 99 6 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 98 1% Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Source: Haver 1%
Transition to sustained recovery? Large corporate savings remain locked away Japan: Corporate Retained Earnings (In percent of GDP) 7 35 64. 6 5 Level (LHS) As % of GDP (RHS) 49.8 52.5 269 55.8 28 57.1 269 6.9 59.9 294 282 34 3 25 4 31.1 38.1 194 33.2 37.8 37.1 189 185 4.5 4.1 24 22 252 2 3 28.2 28.2 27.9 28.2 28.4 27.3 145 14 141 138 142 143 25.6 131 157 168 15 2 1992 1994 1996 1998 2 22 24 26 28 21 212 Source: CAO via Haver analytics 1
Where are we? Abenomics so far successful but now entering critical phase Challenges ahead Inflation needs to rise further Fiscal reforms need to balance adjustment and growth Structural reforms need to address fundamental roadblocks to growth What can be done in short term? Components of GDP growth (In percent) 4 Private consumption Private gross fixed investment 3 private inventory government spending 2 net exports 1-1 212 213 214 215 216 217 218 Source: IMF staff estimates 4 3 2 1-1 -2
Can women save Japan? The economic impact of Japan s declining workforce is reinforced by policies Immigration and Female Labor Participation (In percent) 3 25 AUS Share of Foreign Labor 2 15 1 5 GRE KOR HGR ESP CZE FRA SLV JPN USA AUT DEU GBR CHE NOR DNK FIN CAN -5 5 55 6 65 7 75 8 Female Labor Participation Source: OECD.
Can women save Japan? Bringing WLFP rates to industrial country norms would have a meaningful impact on growth Real GDP: Policy Scenario with Higher Female Participation (In trillion yen) 66 62 58 Forecast Baseline With G7 FLP ratio With Northern Europe FLP ratio 66 62 58 54 54 5 5 46 46 42 199 1995 2 25 21 215 22 225 23 42 Sources: WEO and IMF staff estimates.
Can women save Japan? Increasing the supply of child care would help raise women's labor force participation Daycare Capacity and Waitlisted Children (22-1) (In thousands) 2,2 2,1 2, Daycare Capacity Waitlisted Children (RHS) 28 24 Public Expenditure on Child Support (25) (In percent of GDP) 1.2 1..8.6 Childcare spending as a % of GDP Pre-primary spending as a % of GDP 1.2 1..8.6 1,9 2.4.2.4.2 1,8 22 23 24 25 26 27 28 29 21 Source: MHLW. 16. SWE GBR DEU USA JPN KOR Source: OECD..
Can women save Japan? Tax and pension policies also play a role
Can women save Japan? Eliminating the two-track employment system would raise female participation Female Managers (29) (As percent of total) 5 5 Gender Gap in Median Wages (29) (In percent of male median wages) 4 4 4 4 3 3 3 3 2 2 2 2 1 1 1 1 USA FRA DEU GBR DNK JPN Source: UNDP. Source: OECD KOR JPN DEU GBR USA SWE FRA
Addressing duality The share of non-regular workers has been rising steadily Annual Change (Thousand Persons) 15 1 5-5 -1-15 -2 Regular workers excluding executives (left scale) Non-regular workers (left scale) Share of non-regular workers (right scale) 1985 1988 1991 1994 1997 2 23 26 29 212 Source: Ministry of Internal Affairs and Communications; IMF staff calculations. Percent 4 35 3 25 2 15 1 5
Addressing duality Increased duality has likely depressed labor productivity Japan: Labor Market Duality and Productivity by Economic Sector 7 8% 6 5 4 3 2 1 Productivity* (LHS) Share of Non-regular 7% 6% 5% 4% 3% 2% 1% - % Real estate Electricity, gas, heat supply and water Government, n.e.c. Finance and insurance Services, n.e.c. Manufacturing Transport Construction Information and communications Wholesale and retail trade Medical, health care and welfare Eating and drinking places, accommodations Education, learning support *Productivity is measured by amount of value-added divided by number of workers. Source: Mizuho Research Institute, Ministry of Internal Affairs and Communications; IMF staff calculations.
Addressing duality Options for reform Single employment contract Limited regular contract Moved toward flexicurity model
Addressing duality Not easy from political economy point of view
Addressing duality Labor reforms may need to be accompanied by policies aimed at wage growth Japan (In percent) 6 4 Average annual wage growth rate Labour productivity annual growth rate 2-2 -4 1991 1995 1999 23 27 211 Source: OECD ; IMF Staff calculations.
Thank you
Bond yields have remained low and volatility has declined 1-Year Sovereign Bond Yields (In Percent) 3.5 3 2.5 2 1.5 1 US Treasury Germany JGB 3.5 3 2.5 2 1.5 1 Japan: JGB 1-Year Yields and Volatility (In percent) 1.2 1.8.6.4 1-yr JGB yields Vol (BPS, RHS) 14 12 1 8 6 4.5.5.2 2 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Source: Bloomberg. Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Source: Bloomberg.
What needs to happen? Proceed with fiscal reform, but concrete long-term plan needed to create fiscal space Rising public debt burden requires sustained attention Without further action debt-to GDP continues to rise after 215 What can be done in the short term? Effective stimulus Temporary - no permanent commitment Timely - fast acting Targeted - effective in raising demand Clarity on corporate tax reform Commit to fiscal action beyond 215 (e.g., increase of pension age to 7) D S
With the highest life expectancy and an average retirement age, Japan has scope to raise employment of older workers Life Expectancy at 65 (29) (In number of years) Females Japan France Italy Australia Korea Canada United Kingdom Germany OECD average United States Males Official Retirement Age (as of 211) France Italy Germany Canada OECD United Australia United States New Zealand Japan Korea Women Men Source: OECD 5 1 15 2 25 55 6 65 7
Addressing duality Possibly including a higher minimum wage