abenomics - the saviour of japan

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

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Japan’s Timeline

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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

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v  Deflation has been the root of

Japan’s economic and social problems

Japan’s Demographics

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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

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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

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ABENOMICS

Abenomics Introduction Conclusion Future of

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Abenomics Introduction

Japan’s Revitalization

Monetary Easing

Fiscal Stimulus

Growth Strategy

Conclusion Future of

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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

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Abenomics

BOJ Targets

Positive cycle between

economic activity and financial

markets

Rise in inflation expectations

End of Japan’s 15

year deflation!

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Joint Statement of Bank Of Japan and Government of Japan – TOOLS

Quantitative Measures

Qualitative Measures

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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

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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.

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First Arrow: Qualitative Monetary Easing

Enhanced dialogue with market participants

v  Exchange views pertaining to money market operations and market transactions more generally

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Economic Revitalization

Fiscal Consolidation

Economic Growth

•  Creation of vicious cycle

•  Avoid recession

•  Pave way for Growth Strategy

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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.

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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

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Third Arrow-Strategy for Growth

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CURRENT EFFECTS OF ABENOMICS

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Devaluation of Yen

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Diffusion Index

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Decrease in Unemployment

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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”

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Effects on the World Economy

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Effects of the World Economy Currency War

QUANTITATIVE EASING OF BOJ

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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

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Monetary Policy Target

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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.

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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.

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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

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Success of Quantitative Easing

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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

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Success of Quantitative Easing

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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

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QE vs Abenomics

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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

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3 Arrows

Monetary Easing Fiscal Policy Growth Strategy

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Monetary Easing

1. Correct the strong Yen

2. Instill expectations of inflation

3. Reduce real interest rate

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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

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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.

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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%)

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3 Arrows

Monetary Easing Fiscal Policy Growth Strategy

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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.

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3 Arrows

Monetary Easing Fiscal Policy Growth Strategy

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Growth Strategy

v  The most important yet politically challenging arrow!

v  Government commitment is the key determinant.

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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.

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Conclusion Introduction Future of Abenomics

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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

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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.

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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

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Recent News

v  Japan’s BOP looks decent

v  Its CA Surplus in Sept rose to ¥587billion

11th Nov 2013 : Quartz

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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

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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