USJI Voice Vol.3
Abenomics and the "Quantitative and Qualitative Monetary Easing" (QQE)
: What’s Necessary for Achieving the Growth Strategy?
Japan’s Long-Term Recession and Monetary Policy
In broad terms, the Japanese government’s response to the long-term recession focused on fiscal policy in the 1990s and primarily on monetary policy in the 2000s. The Bank of Japan (BoJ), in particular, has consistently adopted monetary policies that use quantitative easing, embarking on a zero interest rate policy from February 1999, then quantitative easing (QE) from March 2001 to March 2006 after terminating the zero interest rate policy in August 2000, then comprehensive monetary easing in October 2010 following the global economic crisis in September 2008, and then the “Quantitative and Qualitative Monetary Easing” (QQE) on April 4, 2013. QQE is the first of the three arrows that make up the policy package presented by Prime Minister Shinzo Abe.
QQE and Overcoming Deflation
Haruhiko Kuroda, the BoJ Governor appointed by Prime Minister Abe, set the “price stability target” at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI), and aimed to achieve this target at the earliest possible time with a time horizon of about two years, believing that bold monetary easing was needed to exit from prolonged deflation. Under this policy, the BoJ will pursue a new phase of monetary easing both in terms of quantity and quality. For example, it will double in two years the monetary base (total of banknotes, coins, and BoJ deposits) and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds(ETFs), and more than double the average remaining maturity of JGB purchases.
Assessments of the currently most controversial policy, QQE, are divided mainly between those who actively support it and those who refute it. Those who are supportive of QQE argue that as a result of taking bold monetary easing actions that underpin a clear commitment to achieving the inflation target, inflation expectations rose, and therefore, commodity prices and stock prices increased. They contend that the vicious cycle of deflation was broken because bold easing measures that exceeded expectations were taken based on QQE. They assert that if, in turn, the nominal growth rate increases, then tax revenue would increase and this would lead to fiscal consolidation. Conversely, the naysayers argue that while yes the yen depreciated and stock prices rose, this was not due to the effects of QQE and the negative and adverse effects of excessive monetary easing outweighed the benefits.
The naysayers underscore that neither Japanese exports increased, nor capital investment and loans. They say that the commodity price increases can be explained in large part by the calming of the Euro debt crisis, which corrected the excessive yen’s appreciation and brought about the yen’s depreciation. They criticize that increasing the monetary base essentially creates an accommodative environment for issuing JGBs, which is ultimately debt monetization. In particular, they underline the vast inconsistencies that arise after the exit from quantitative monetary easing. In other words, increasing only the nominal growth rate through inflation will not improve the treasury budget.
Assessment of the 1.5 Years Following the Execution of QQE
First, I would like to assess the feasibility of realizing a rate of CPI increase of 2 percent in 2 years. I contend that even if this was feasible, it is questionable whether this can be attributed to the impact of QQE. It can be deemed that the yen’s depreciation had a significant effect on this. While the inflation expectations of households have risen, the consumption tax increase may have played a part in this. Furthermore, even if the price increase rate of 2% were achieved, increasing the real wage will remain difficult. As a matter of fact, if the bold monetary policy (first arrow) succeeds, then problems may very well arise after exiting from this policy. Should CPI approach 2%, an exit would need to be explored. It is inevitable that the JGB market would be impacted in the process of rolling back QQE.
The judgment as to whether QQE succeeded or not rests on whether the Japanese economy broke free from deflation, and by extension, whether the economy is on a steady path towards expanding domestic private demand. There are indeed signs that the personal loan balance has exited at least the worst of the downturn, supported by personal consumption growth. Nonetheless, as of now, it is difficult to judge whether the economy has broken free from deflation, taking also into account private capital investment trends.
What is Needed for the Japanese Economy of the Future?
The fundamental causes of the long-term stagnation facing the Japanese economy lie with the structural advancement of the declining birthrate and aging population, chronic budget deficit, and the hollowing-out of overseas production shifts and the domestic economy due to the yen’s appreciation over the long-term. Monetary policy alone will not put the Japanese economy on track to exiting from this situation. The essential question is how to develop industries that will drive Japan’s next growth or how to finance businesses that will drive growth, while putting Japan on track to reducing its budget deficit. Nevertheless, Japanese investors give priority to safety and hardly have strong incentives to finance risky businesses. In order to overcome such circumstances so that the necessary funds are provided to new businesses that will drive economic growth in the next generation, Japan needs a scheme that will accurately analyze and assess the risks of businesses, along with their future potential and growth potential. Furthermore, such a scheme will be effective. To this end, I believe university researchers can be employed as “appraisers” for evaluating the future potential and profit potential of new businesses. By “appraiser,” I do not mean the professionals who accurately appraise and determine the value of antiques and other collectibles. I am referring to the experts who have capacity based on their expertise to carry out an honest analysis and evaluation of the future potential and profit potential of businesses, including the risks that accompany such businesses, and to provide information to financiers that is as objective as possible to aid their decision-making.
Against the backdrop of the catching-up of emerging economies, the industries that will propel the Japanese economy of the next generation will be the manufacturing industries, especially the automobile, electronics, machinery, and semiconductor industries, as well as new industries, such as the environment, information, medical, biotechnology, agricultural, disaster management, and energy industries. Leading examples of new industries that will drive future growth include: iPS cell applications to regenerative medicine and their commercialization; and the promotion of hydrogen energy as a replacement for fossil fuels. However, as is evident from the fact that iPS cell research is led by Kyoto University and hydrogen energy research by Kyushu University, these new industries are being spearheaded by universities and with government subsidies that are provided to the universities. This is the case as the more innovative a new business of these industries is, the business is accompanied with growth potential as well as risks. What Japan needs to do is attract private funds to such sectors which have future potential and turn them into businesses in the market economy. Yet for financial institutions, making loans in innovative sectors involves risks. At the very least, it cannot be said that financial institutions are enthusiastic about giving out loans to such businesses. This is where the need comes into establishing a scheme for conducting scientifically-based analyses and assessments of the future potential and growth potential of businesses that make use of leading-edge technologies. But it is impossible for financial institutions to immediately provide their own “appraisers” of new businesses; nor do they have to. Financial institutions may request analyses and assessments to experts who are based at universities or research institutes and have access to the latest information. This will allow financial institutions to make use of the “appraiser” function at considerably lower cost than if they were to find their own “appraisers” of new businesses with the latest knowhow. Today, the research information of universities is made
public as much as possible. It should thus be easy to find out on the Internet, which experts with which expertise are based where. From the perspective of university researchers, receiving a certain fee for such analysis and assessment work, if such a scheme is established, could lead to increases in research funding. Or if researchers discover areas of the business that could be improved, that may in turn lead to the initiation of joint research to make the improvements. If there exist institutional barriers to the development of such schemes, the government should make efforts to remove them as much as possible.
I believe making proactive use of the intellectual property available at universities via financial institutions will be effective for reviving the Japanese economy, in particular, local economies. What’s needed to increase the effects of the third arrow of Abenomics and propel the Japanese economy to the next growth stage is the close coordination of namely, companies that engage in new businesses, universities that assess the technical strength and profit potential of new businesses, financial institutions that have the ability to give out loans to businesses, and the government that takes measures to ensure the effective functioning of the system.