The last fortnight has seen easing action from the European Central Bank followed by an interest-rate rise from the US Federal Reserve. This morning we saw the response of the Bank of Japan so let us first remind ourselves of what it has been up to.
The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
If we look at the broad sweep of the program under Governor Kuroda then the monetary base has been increased from just under 150 trillion Yen in early 2013 to just under 350 trillion Yen now so this does qualify under the pumping it up category. The vast majority of the easing has come in the form of purchases of Japanese government bonds (JGBs) and according to Bloomberg it has been on this scale.
The BOJ held a record 315 trillion yen ($2.6 trillion) of Japanese government bonds as of the end of September, 30.3 percent of the total, data released Thursday show.
As it is munching away like a Pac-Man there will be more now and for comparison it held some 13.2% of the market when Governor Kuroda pressed the button for what is called QQE in Japan. After all QQE or Qualitative and Quantitative Easing reads and sounds so much better than QE 13 and 14 doesn’t it?
The other side of the policy move has been a fall in the value of the Japanese Yen. If we look back we see that it was below 80 to the US Dollar when it looked like Shinzo Abe was going to be elected and is 121 now. So conventional economic theory has worked here as we see monetary expansion lead to a currency depreciation. However if we look at this exchange-rate or the effective one we see that the fall has stopped in 2015 and the situation is now treading water.
What has the Bank of Japan done today?
There was a minor alteration to the purchases of JGBs
The average remaining maturity of the Bank’s JGB purchases will be about 7-10 years until the end of this year and be extended to about 7-12 years from the beginning of next year.
Perhaps they are running out of ten-year bonds to buy or are trying to avoid a metric ( 10 year yield) that is quoted around the world. Also we saw a minor change to the purchases of equities.
The Bank will establish a new program for purchasing ETFs at an annual pace of about 300 billion yen……. Under this new program, the Bank will purchase ETFs composed of stocks issued by firms that are proactively making investment in physical and human capital.
Regular readers will not be surprised to read that the Bank of Japan is buying equities although new ones might be as it does not get enormous publicity. Also the new effort which adds some 10% to the program appears to have civil servants “picking winners” which if that worked Japan would never have plunged into the Lost Decades. Indeed the initial opening is somewhat bizarre.
The new program will start with purchases of ETFs which track the JPX-Nikkei Index 400.
How do you specifically boost “physical and human capital” by buying a passive equity market tracker?
The view that Abenomics has been a success
Actually some were proclaiming it as a success before it even began but the more recent argument looks at two main numbers. Firstly they concentrate on nominal GDP which has indeed risen but you may already be wondering why they have shifted from real GDP? Secondly they point out that Japan has an unemployment rate which by falling to 3.1% has reached levels last seen in the mid-1990s. Thirdly that wage growth has improved considerably.
Examining the state of play
The shift to looking at measures of nominal GDP immediately implies that real GDP is not telling the story wanted! If we look at it we see that the economy shrank in 2014 and according to Japan Macro Advisers is expected to do this in 2015.
Instead, 2015 would be an “OK” year, with the overall growth rate of 0.6-0.9%, depending on the outcome of the October-December quarter.
In my opinion the concentration on nominal GDP switches us to looking at dealing with the public-sector debt problem rather than actually improving the position of Japan’s workers and consumers. Also to be fair we can nudge up the real GDP numbers to more like 1% if we look at it on a per capita basis as the population is shrinking.
If we move to examining the state of play I find that to be a disappointment and the simple reason is driven by the fall in oil and commodity prices. I have quoted the section below many times now from the EIA.
It is the third largest oil consumer and net importer in the world behind the United States and China. Furthermore, it ranks as the world’s largest importer of liquefied natural gas (LNG) and second-largest importer of coal.
So the Japanese economy should surely be pushing forwards very strongly after all it is perhaps the biggest beneficiary around from lower commodity and especially energy prices. Post Fukushima we were told that high energy prices were a big deal as it imported ever more energy have people change their mind? Surely an energy importer like Japan prefers lower over higher prices?
If we look at the economic growth figures in that light you see why I consider it to be a disappointment
The Labour market
It is true that unemployment has dropped to levels not seen since the early stages of the lost decades. However if you look at the pattern the fall started in mid-2009 some three years before Abenomics was even a twinkle in Shinzo Abe’s eye. So you can argue that he continued the trend and there do seem to have been some improvements in getting women into the labour force in what remains a traditionalist and misogynistic society. Also apart from the Euro area Japan is far from alone in improving its unemployment figures as the US and UK demonstrate. Furthermore just like us gaijin there are challenges to the unemployment fall, from Japan Macro Advisers.
The decline in the unemployed (in October) are mostly caused by retiree exiting from the work force, not through a creation of employments.
This for me is a crucial battleground for Abenomics and let me shift to Bloomberg who have been cheerleaders for claimed improvements in this area.
Summer bonuses were 2.8 percent lower than last year and employees are in for more disappointment this winter. Compared with last year, the December payouts will be 1 percent smaller, estimates BNP Paribas. Mitsubishi UFJ Research and Consulting is even more downbeat, projecting a 2.1 percent decline.
So whilst basic pay has edged higher ( it rose by 0.2% year on year in October) it seems that what Japanese employers give with one hand they take back with another. It is not as if they (especially the bigger companies) are short of money as they are flush with cash but if we compare real wage growth with the UK or US we see that it disappoints overall. There has been a rise in wages as they fell in 2013 and a little in 2014 whereas 2015 should see some modest growth. But to call this a success should we not be seeing real wage growth of the sort of level we are seeing in the UK and US? Also we have the awkward issue that by driving prices higher ( after all if there was no Abenomics we would be seeing negative inflation in Japan now) Abenomics has driven wages lower.
There is much to consider in the state of play in Japan. My argument has been that Abenomics has mostly been a competitive devaluation with from its point of view hopefully some inflation to help with the public-sector debt program. Of the initial claims that it would be reform rather than pork barrel politics we see that there has been some success in getting more women into the labour force, however other reforms are thin on the ground.
The price for this has been for the ordinary Japanese more inflation and falls in real wages which ironically undermines the economic situation as consumption falls. Also if they wish to buy something from abroad it is much more expensive unless of course it is oil or a commodity. There is an irony for Abenomics fans as they have to face the conundrum that something which is good (lower prices) is bad in Orwellan fashion.
Another way of putting this is whether you can push economic buttons and pull levers and hey presto things get better. I do not but one person who was at the Bank of England does think so and he is now lauded at the Peterson Institute as his record on UK inflation gets redacted. What does he suggest?
What is needed is a jump-start to a wage-price spiral of the sort feared from the 1970s……….We believe that such a process is best triggered by an increase of nominal wages and other benefits by 5 percent to 10 percent by fiat in the next year.
In itself that would be a good thing but there is a difference between something occurring naturally and it being applied by dictat. Along the lines of Goodhart’s Law or the Lucas Critique. After all a 5% pay rise because a company is doing well is different to imposing it.
As ever whatever monetary expansion we get never seems to be quite enough does it?