Abenomics by Andrew Smithers

Daiwa Anglo-Japanese Foundation

London, 18th April, 2013.

Slide 1. The Conventional Wisdom.

• Japan has suffered from two “lost decades”.

• This is due to a failure to boost the economy sufficiently

with fiscal and monetary stimuli.

• Deflation has depressed demand and thereby the economy.

Slide 2. Reality.

• Growth has been slow due to demography.

• Deflation has been more of a help than a hindrance.

• Japan’s productivity has improved more than France or

Germany.

• As in all developed economies, poor policies have held back

growth.

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

France

Germany

Japan

UK

US

% p.a. change in GDP at constant prices per person employed.

Slide 3. G5: Productivity 1992 - 2012.

Data Sources: National Accounts via Ecowin.

Slide 4. Policy Failure.

• Neither fiscal policy nor monetary stimuli have been

insufficient.

• The problem has been the wrong policies.

• Ignoring Japan’s key problem is the cause of bad policies.

Slide 5. Japan’s Key Problem.

• Japan has a structural corporate cash flow surplus.

• This comes from excessive past investment and

• Current excessive depreciation allowances.

-15

-10

-5

0

5

10

15

1980 1984 1988 1992 1996 2000 2004 2008

Secto

r le

nd

ing

(+

) or b

orro

win

g (

-) a

s %

of

GD

P.

Data Sources: Cabinet Office Website National Accounts 2003 and 2011.

Slide 6. Fiscal Deficits = Other Sectors' Surplus.

Government Households

Companies Export of Capital

Slide 7. It’s Not A Cyclical Problem.

• Advocates of fiscal and monetary stimuli assume that

companies’ cash surplus is a cyclical problem.

• Hence the nonsense about deflation.

• Inflation advocates assume that negative real interest rates

would boost investment.

• If they did, it would make things worse!

Slide 8. Japan Overinvests.

• Japan invests more than other G5 countries both business

(Slide 9) and total.

• Through demography, not poor productivity, it grows

slowly (Slide 10).

• It wastes investment (Slide 11).

6 7 8 9 10 11 12 13 14 15

France

Germany

Japan

UK

US

Business investment as % of GDP.

Slide 9. G5: Business Investment as % of GDP.

2012 1991 - 2012

Data Sources: National Accounts via Ecowin.

0 5 10 15 20 25 30

France

Germany

Japan

UK

US

Fixed capital investment as % of GDP.

Slide 10. G5: Total Investment as % of GDP.

2012 1991 - 2012

Data Sources: National Acounts via Ecowin.

0 0.5 1 1.5 2 2.5 3

France

Germany

Japan

UK

US

% p.a. change in GDP at constant prices 1992 - 2012.

Slide 11. G5: Growth Rates 1992 - 2012.

Data Sources: National Accounts via Ecowin.

0 5 10 15 20 25 30 35

France

Germany

Japan

UK

US

Investment as defined as % of GDP divided by % p.a. change in GDP over period.

Slide 12. G5: ICORs (Incremental Capital/Output Ratios).

Business Total

Data Sources: National Accounts via Ecowin.

Slide 13. The Case for Inflation.

• Deflation keeps real interest rates positive.

• This depresses investment.

Slide 14. The Case Against Inflation.

• It might boost investment, which is too high.

• High past investment increases depreciation (Slide 14).

• This causes the structural savings’ surplus.

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Dep

recia

tion

an

d i

nv

est

men

t o

ver

pre

vio

us

12

mo

nth

s.

Data Sources: MoF Quarterly Survey of Incorporated Enterprises.

Slide 15. Japan: Non-financial Companies' Investment in

Equipment.

Depreciation

Investment in Plant and Equipment

Slide 16. Why Corporate Cash Flow is Too High.

• Depreciation allowances are too high.

• Depreciation is a function of growth or real wages and this

has fallen from 4% p.a. in the 1980s to c. 1% today (Slide

16).

• Companies don’t distribute, as dividends, more than 100%

of their profits.

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

% p

.a. ch

an

ge o

ver

pre

vio

us

3 y

ea

rs

in G

DP

at

co

nst

an

t

pric

es

per

perso

n e

mp

loy

ed

an

d e

mp

loy

ee c

om

pen

sati

on

ad

just

ed

fo

r ch

an

ge i

n C

PI.

Data Sources: MIC and Cabinet Office.

Slide 17. Japan: % p.a. Change over 3 Years in

Productivity and Real Wages.

Productivity Real Wages

Slide 18. Other Changes Needed.

• Companies cannot take full burden.

• Current account surplus must also rise.

• The fall in the yen is essential and must be maintained.

• Household savings are already low (Slide 19).

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Ho

use

ho

ld s

av

ing

s a

s %

of

dis

po

sab

le i

nco

me.

Data Sources: Cabinet Office National Accounts 2011 and 2009.

Slide 19. Japan: Household Savings.

Net Gross

Slide 20. Abenomics Conclusion.

• Weak yen – good.

• Inflation aim – bad.

• Fiscal stimulus – bad.