Opinion

Anatole Kaletsky

After initial promise, Japan’s new economy risks backsliding

Anatole Kaletsky
Nov 29, 2013 15:55 UTC

At a time when economic optimism is growing and stock markets are hitting new highs almost daily, it is worth asking what could go wrong for the global economy in the year or two ahead. The standard response, now that a war with Iran or a euro breakup is off the agenda, is that some kind of new financial bubble could be about to burst in the U.S. But a very different, and rather more plausible, threat is looming on the other side of the world.

Japan is the world’s third-biggest economy, with national output roughly equal to France, Italy, Spain, Portugal and Greece combined. This year, Japan has become, very unusually, a leader in terms of financial prosperity and economic growth. According to the latest IMF forecasts, Japan’s 2 percent growth rate in 2013 will be the fastest among the G7 countries, easily outpacing the next strongest economies, Canada and the U.S., each with 1.6 percent growth. Japan’s stock market has gained 70 percent since last December, far exceeding the 25 percent bull market on Wall Street, and Japan’s corporate profits are projected to increase by 17 percent, according to Consensus Economics, compared with the paltry gains of 3 to 4 percent in Germany and the U.S.

As someone very much caught up in the economic optimism inspired by the election of Shinzo Abe, I fear it is now time for a reality check. And observing the complacent inertia that seems suddenly to have paralysed Japan after July’s Upper House election, it seems worth recalling the famous maxim (usually attributed to Keynes) about unexpected events: “When the facts change, I change my mind.”

The reasons for pessimism follow directly from the main driving forces of Japan’s new economic programme, the so-called “three arrows” of Abenomics: fiscal stimulus, monetary expansion and structural reform. The second of these arrows — monetary expansion — is flying as fast as ever. But the first, fiscal, arrow is about to turn into a boomerang that could kill Japan’s economic recovery stone dead. In April an increase in consumption tax from 5 to 8 percent, along with some cutbacks in public spending, will produce a narrowing of the structural budget deficit worth 2.5 percent of GDP, according to the IMF.

This massive fiscal tightening, which happens to be exactly equivalent to the U.S. fiscal tightening in 2013, to Italy’s in 2012 and to Britain’s in 2011, is a very big risk to take with the Japanese economy’s still-tentative recovery. While the Abe government has made vague promises to cut other taxes or boost public works spending to offset some of the deflationary impact of the consumption tax increase, it has notably failed to provide any details. Given that the tax hike will hit the economy in April, time is running out for any effective offset to be proposed. It seems, in fact, that the Finance Ministry opposes any significant easing of next year’s fiscal burden. Far from being ready “to do whatever it takes” to promote economic recovery, as I had expected, Japan’s bureaucracy seems to prefer to wait and see how April’s tax hike affects the economy before proposing any compensating relief. The trouble is that by the time a collapse in consumption becomes apparent, it may well will be too late to prevent another recession.

The end of the Fed’s taper tantrum

Anatole Kaletsky
Nov 21, 2013 15:03 UTC

Following Wednesday’s publication of the Federal Open Market Committee minutes, we now know that a reduction in U.S. monetary stimulus could be on the agenda for the next FOMC meeting on December 19. How much does this matter?

When the Fed unexpectedly decided not to “taper” in September, the markets were stunned and gyrated wildly, although investors had only themselves to blame for being wrong-footed in this way. Ben Bernanke had made crystal clear his reluctance to reduce monetary stimulus as long as the U.S. economy appeared to be weakening, which appeared to be the case throughout the summer. By December 19, the situation may well be very different, since the economy will probably be improving and the U.S. fiscal stalemate may well have been resolved. If such improvements happen, the Fed will have no compunctions about wrong-footing investors again, in the opposite direction, as this column suggested last month.

So what will be the impact on the world economy and financial markets if the Fed decided to taper as early as December? The answer is, not much. As long as the Fed stands by its commitment to keep interest rates near zero for the foreseeable future, tapering will have no major economic impact. Therefore its financial significance should also be marginal, except insofar as investor psychology overwhelms rational economic analysis.

Central bank stimulus is here to stay, but what if it fails?

Anatole Kaletsky
Nov 14, 2013 16:29 UTC

If anyone still doubted that central bankers all over the world will keep interest rates at rock-bottom levels, those doubts should have been dispelled this week. Janet Yellen’s statement on Thursday to the U.S. Senate that the Fed has “more work to do” to stimulate employment, and that “supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” capped a series of surprisingly clear commitments to easy money from central bankers this week. On Wednesday Joerg Asmussen, a member of the executive board of the European Central Bank, and Ewald Nowotny, the Austrian central bank governor — both of whom had previously been reported as voting against last week’s surprise ECB rate cut — said that they might in fact support further rate cuts and even negative interest rates, as well as the possibility of breaking the taboo against U.S.-style purchases of government bonds. And Mark Carney, the Governor of the Bank of England, reiterated more strongly than ever that any early increase in British interest rates was out of the question, despite the fact that the outlook for the British economy has turned out to be much better than the BoE had expected.

But what if these zero interest rate policies produce disappointing results in the year ahead, as they have in each of the past four years? What if the world economy fails to spring back to life or just plods along with sub-par growth, despite all this stimulus, as has happened in each of the past four years?

With luck, these questions will not need answering because fiscal austerity has acted as a powerful headwind to economic recovery in the U.S., Europe and Britain and these budget consolidation efforts are now being relaxed. The new records on Wall Street and other stock markets suggest growing confidence among investors that monetary stimulus will finally deliver decent levels of growth next year — and this does indeed seem likely. But what if the optimism turns out to be wrong? What if the U.S. and Britain fail to grow by at least 3 percent next year, and what if Europe stays stuck with sub-1 percent growth and mass unemployment? In that case, the monetary and fiscal policy experiments since the Lehman crisis would have to be judged as failures — and that judgment would open the way to much more radical ideas than zero interest rates and QE. Such radical ideas would be of two opposing types.

This weekend, China will plot its economic future

Anatole Kaletsky
Nov 6, 2013 20:13 UTC

The ponderously named Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, which takes place this weekend, is a more important event for the world economy and for global geopolitics than the budget battles, central bank meetings and elections that attract infinitely more attention in the media and financial markets.

The obvious reason for this meeting’s importance is that China is destined in the long run to become the world’s biggest economy and a political superpower. And the Third Plenum, traditionally held roughly 12 months after the appointment of a new Party leadership, has been used twice before as an occasion for the new leaders to spell out the main strategies they hoped to implement as they consolidated their power. At the Third Plenum in 1978, Deng Xiaoping launched the market reforms that unleashed the power of the profit motive in China, and it was at the corresponding event in 1993 that Jiang Zemin accelerated the process of dismantling state-owned enterprises and integrating China into the world economy that culminated with China’s accession to the World Trade Organization in 2001.

A second, more immediate, reason for the world to pay attention to this weekend’s meeting is that China has recently become not just the strongest engine of growth in the world economy, but also the biggest source of potential economic surprises, both good and bad.

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