abenomics - the saviour of japan
TRANSCRIPT
ABENOMICS:
FNCE102
The Savior of Japan?
Group 3 | G10 Archit Ajit Sharma
Cheryl Yuen Su Min Ly Phuong Dung (Jenny)
Sneha Sultania Tran Thi Nhat Tra
AGENDA
Introduction Abenomics Current Effects
Quantitative Easing by
BOJ
Future of Abenomics Conclusion
INTRODUCTION
Abenomics Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects Introduction
Japan’s Timeline
Abenomics Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects Introduction
End of World War II
1945
1950
Amazing economic
growth in Japan
1990
2011 The Great East
Japan Earthquake
Introduction of Abenomics
2012 2010
Lost Two Decades
1980
Video
Reasons for Japan’s Recession
Abenomics Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects Introduction
v Deflation has been the root of
Japan’s economic and social problems
Japan’s Demographics
Abenomics Conclusion Future of
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Easing by BOJ Current Effects Introduction
v Due to habitual savings v Japan’s aging population v Elderly has the tendency to save, this aging population would
mean greater savings
Japan’s Debt
Abenomics Conclusion Future of
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Easing by BOJ Current Effects Introduction
v Weakens their economy, as it encourages consumers to postpone their spending
v Causes corporations to expect little market growth, and constrain the investment in employment and capital stock
v Companies cut cost due, leading to wage cut
v Corporate earnings fell, causing interest rate to fall to low levels
Japan’s Stocks
Abenomics Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects Introduction
ABENOMICS
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
Abenomics Introduction
Japan’s Revitalization
Monetary Easing
Fiscal Stimulus
Growth Strategy
Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
The Three Arrows
v Sustainable economic growth led by private demand v Nominal GDP growth of around 3 per cent v Real GDP growth of around 2 per cent
Abenomics
First Arrow - Monetary Easing
TARGETS – Joint Statement by BOJ & Government of Japan v To achieve price stability target of 2 per cent with a
time horizon of around 2 years v To increase the real interest rates
Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
Abenomics
BOJ Targets
Positive cycle between
economic activity and financial
markets
Rise in inflation expectations
End of Japan’s 15
year deflation!
Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
Joint Statement of Bank Of Japan and Government of Japan – TOOLS
Quantitative Measures
Qualitative Measures
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
First Arrow: Quantitative Monetary Easing Adoption of monetary
base control Increase in JGB
purchases Increase in J- REIT
purchases and ETFs
138 trillion yen
200 trillion yen (2013P)
270 trillion yen (2014E)
• Main operating target for money market operations is changed from uncollateralized overnight call rate to the monetary base.
• The monetary base will increase at an annual pace of about 60 – 70 trillion yen.
• Further decline in interest rates across the yield curve.
• Purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen
• Monthly flow of JGB purchases is expected to become 7+ trillion yen on a gross basis.
• Open-ended asset purchases
• To lower risk premium of asset prices, BOJ will Purchase ETFs to increase the amount outstanding at a pace of 1 trillion yen.
• (J-REITS) - its amount outstanding will increase at an annual pace 30 billion yen.
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
First Arrow: Quantitative Monetary Easing Adoption of monetary
base control Increase in JGB
purchases Increase in J- REIT
purchases and ETFs
138 trillion yen
200 trillion yen (2013P)
270 trillion yen (2014E)
• Main operating target for money market operations is changed from uncollateralized overnight call rate to the monetary base.
• The monetary base will increase at an annual pace of about 60 – 70 trillion yen.
• Further decline in interest rates across the yield curve.
• Purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen
• Monthly flow of JGB purchases is expected to become 7+ trillion yen on a gross basis.
• Open-ended asset purchases
• To lower risk premium of asset prices, BOJ will Purchase ETFs to increase the amount outstanding at a pace of 1 trillion yen.
• (J-REITS) - its amount outstanding will increase at an annual pace 30 billion yen.
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
First Arrow: Quantitative Monetary Easing Adoption of monetary
base control Increase in JGB
purchases Increase in J- REIT
purchases and ETFs
138 trillion yen
200 trillion yen (2013P)
270 trillion yen (2014E)
• Main operating target for money market operations is changed from uncollateralized overnight call rate to the monetary base.
• The monetary base will increase at an annual pace of about 60 – 70 trillion yen.
• Further decline in interest rates across the yield curve.
• Purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen
• Monthly flow of JGB purchases is expected to become 7+ trillion yen on a gross basis.
• Open-ended asset purchases
• To lower risk premium of asset prices, BOJ will Purchase ETFs to increase the amount outstanding at a pace of 1 trillion yen.
• (J-REITS) - its amount outstanding will increase at an annual pace 30 billion yen.
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
First Arrow: Qualitative Monetary Easing
Enhanced dialogue with market participants
v Exchange views pertaining to money market operations and market transactions more generally
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
Economic Revitalization
Fiscal Consolidation
Economic Growth
• Creation of vicious cycle
• Avoid recession
• Pave way for Growth Strategy
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
Second Arrow-Fiscal Stimulus
Types of Fiscal Stimulus
Short term
Government Consumption
Public Works Investment
Medium Term
Improving Primary Balance
of General Account
• Boost total spending to 25 trillion yen
• Infuse 3.8 trillion yen on post-quake reconstruction
• Contribution to the state pensions of 2.8 trillion yen
• Total amount of supplementary budget – 13.1 trillion yen
• 5.3 trillion yen as a part of the 2013
budget - indicates the change in
fiscal tightening in the recent years.
By 17 trillion yen of the national and local governments in FY2014 and FY2015.
• The utmost effort must be exerted both on the expenditure and revenue sides.
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
FY 2013 FY 2014 FY 2015
Targets for the primary balance of the General Account
A deficit of 23 trillion yen
A deficit of around 19 trillion yen
A deficit of around 15 trillion yen
v Post-quake reconstruction and disaster prevention v Creation of wealth though growth v Ensuring a sense of security in daily life
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
Third Arrow-Strategy for Growth
Abenomics Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Current Effects
CURRENT EFFECTS OF ABENOMICS
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Devaluation of Yen
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Diffusion Index
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Decrease in Unemployment
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Effect on Stock Index
According to Jerry Schiff, the IMF's mission chief for Japan, “A Japanese revival would be a significant benefit to the world economy at a time when there
are not a lot of other drivers of global growth”
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Effects on the World Economy
Current Effects Introduction Conclusion Future of
Abenomics Quantitative
Easing by BOJ Abenomics
Effects of the World Economy Currency War
QUANTITATIVE EASING OF BOJ
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
v BOJ is the first central bank to implement QE to fight domestic inflation
v It aimed to boost the CAB in excess of the required reserve
v BOJ explicitly claimed to maintain the programme until Japan is out of deflation
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Monetary Policy Target
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Instruments
v The BOJ publicly committed to keep QE until the core CPI either reached zero or rose in the y-o-y basis for several months.
v In March 2001, Japan’s core CPI had been positive for 3 consecutive months, signaling a sustained recovery and prompting the BOJ policy makers to stop the QE.
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Commitment Horizon
v QE revived the Japanese economy v The core consumer prices were rising steadily
during the last 3 months of implementation of the policy.
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Success of Quantitative Easing
3 Successes of QE 1. Stabilize the banking system, improve liquidity and boost lending between banks and from banks to households
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Success of Quantitative Easing
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Success of Quantitative Easing 2. Decrease the long term interest rates to a certain extent
3. BOJ’s explicit pre-commitment to end the QE only when the y-o-y changes in the CPI turned positive in a stable manner increased market confidence
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
Success of Quantitative Easing
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
QE vs Abenomics Similarities Differences
Both involve the increase in excess reserves of financial institution
The third arrow of Abenomics, which aims at revitalizing industries creating markets for selected sectors within the promise of future growth and expanding global outreach
BOJ policy makers and Shinzo Abe publicly confirmed the commitment of their policies and thereby improved the market expectation
Abenomics is more comprehensive and thus, will revive the Japanese economy more than QE did
Differences
v The third arrow of Abenomics, which aims at revitalizing industries, creating markets for selected sectors with the promise of future growth, and expanding global outreach.
v Abenomics is more comprehensive and thus, will revive the Japanese economy more than QE did
Quantitative Easing by BOJ Introduction Conclusion
Future of Abenomics
Current Effects Abenomics
QE vs Abenomics
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
FUTURE OF ABENOMICS
Potential Growth Rate of nearly 2%
CPI Inflation Rate of 2% in 2 years
GOALS
OUTCOMES
Success Partial Success Failure
✔
✖ ✔
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✔✖
✔✖
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
3 Arrows
Monetary Easing Fiscal Policy Growth Strategy
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
Monetary Easing
1. Correct the strong Yen
2. Instill expectations of inflation
3. Reduce real interest rate
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
Monetary Easing
1. Correct the strong Yen
The Yen has been depreciating, but it does not seem to have significant impact on Japan’s export and trade balance.
v Automobile makers are not willing to bring their manufacturing operations back to Japan
v There are other factors such as global demand and global economic cycle that affect the level of exports
v Weaker Yen harms import sector
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
Monetary Easing
2. Instill expectations of inflation
Targeted CPI inflation rate of 2% and the increase in consumptions may not be likely to be achieved.
v In May 2013, y-o-y growth of Tokyo’s CPI was only 0.1%
à prices are likely to increase moderately
à 1% would be an appropriate inflation rate for the next few periods
à Fall short of BOJ’s target of 2%
v The wealth effect is unlikely lead to sustainable gains in broader consumption
v Companies refuse to raise wages
à Consumers do not expect the prices will rise.
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
Monetary Easing
3. Reduce real interest rate
Real interest rate is decreasing. But could it be sustained at expectedly low level?
v Sep 2013, core CPI > 10-year bond yield à RIR turned negative à GOOD NEWS!
v Problems? à Keep purchasing a large quantity of
bonds to keep the nominal rates low à increase level of debt!
à Slow-growth in inflation level (1%)
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
3 Arrows
Monetary Easing Fiscal Policy Growth Strategy
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
Fiscal Policy
1. With high debt, Japan’s credit ratings would fall
2. Consumption tax hike will offset the effects of stimulus package
v Aug 19, Moody’s issued a warning: “A tipping point for creditworthiness would eventually loom if growth remains elusive and the government’s debt and refinancing needs remain at very high level”
v High debt might “backfire” the plan.
v Tax rate = 8% in FY14 and 10% in FY15.
v Offer stimulus package of 5 trillion yen to minimize the drag on the economic growth
à Interrupt the ongoing recovering process.
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
3 Arrows
Monetary Easing Fiscal Policy Growth Strategy
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
Growth Strategy
v The most important yet politically challenging arrow!
v Government commitment is the key determinant.
Future of Abenomics Introduction Conclusion
Quantitative Easing by BOJ
Current Effects Abenomics
v Japan is on the verge of an incredible transformation.
v The process will definitely take time.
v PARTIAL SUCCESS!
v Growth rate and inflation rate of 1% v Potential problems deterring the transformation process such as low potential growth in exports, low expectation of
rising price, high debt, consumption tax hike.
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Recent News 5th Nov 2013: Bloomberg
Progress on the growth strategy has
been slow
Economist at Meiji Yasuda Life Insurance Co
1. Slowing Growth v The Topix fell less than 0.1% that day, a
third day of decline
2. Wages fall v Regular wages fell for a 16th month
straight in September v Abe comes up short when it comes to
measures to spur business investment. v The scale and speed of efforts to
remove international trade barriers, lower corporate taxes and deregulate are inadequate
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Recent News 5th Nov 2013: Bloomberg
3. Monetary Base v Forecast that monetary base will
increase to 270 trillion by end 2014 v However, the median1.9% price view is
too optimistic and urged central bank to more clearly reflect downside risks
4. Another Arrow v Need to fire another arrow aimed at
devaluing the yen if Abe administration is unwilling to risk a sharp economic slowdown.
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Recent News 10th Nov 2013: The Wall Street Journal
v Negative 1.1% of merchandize export from June-Sept 2013
v Seems that Abenomics is faltering
v Possible reasons: à The negative impact from the slowdown in emerging markets à Jump in consumer spending is wearing off
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Recent News
v Japan’s BOP looks decent
v Its CA Surplus in Sept rose to ¥587billion
11th Nov 2013 : Quartz
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Recent News 11th Nov 2013 : Quartz
v Unadjusted numbers show that Japan’s CA is in deficit
v The third time when the unadjusted BOP went into deficit
Conclusion Introduction Future of Abenomics
Quantitative Easing by BOJ
Current Effects Abenomics
Recent News 10th Nov 2013: The Wall Street Journal
v Foreign investors are pouring billions of dollars into Japanese stocks
v In Oct, Abe also overcame opposition to increase consumption tax to help ease the nation’s debt burden
v A steady yen is a further plus for foreign investors
v Renewed focus on Japan has drawn new investors
Q & A