Did the Bank of Japan disappoint the financial markets on Friday by refusing to infuse a round of massive monetary stimulus or did the markets fall victim to their own hype? Well, here’s how the Japan saga unfolded. A few weeks back Japan’s Prime Minister Shinzo Abe and some senior officials met former US central bank boss Ben Bernanke who apparently suggested a radical remedy for Japan’s persistently low growth. The rumour is that Bernanke, or “Helicopter Ben” as he is somewhat unfairly referred to, suggested the use of a “helicopter money” strategy that as he describes in his more prosaic terms as expansionary fiscal policy — an increase in public spending or a tax cut — financed by a permanent increase in the money stock or a Money-Financed Fiscal Program.
Abe appeared to have delivered on his fiscal promise with the announcement of a 28-trillion yen tax and spend package although the details are still awaited. The markets waited for the Bank of Japan to follow through with a hefty increase in its bond buying programme (when a central bank buys bonds it pays for it with fresh money) from the already humongous 80 trillion yen of purchases (775 billion dollars). However, in its policy meeting on Friday it kept this amount unchanged and offered to purchase an additional 57 billion dollars of exchange traded funds, a piffling amount relative to expectations that left the markets cold.
The immediate impact was a pop in the yen that ended the trading day on Friday with a post-policy gain of 1.8 per cent against the dollar. That is bad news for both Japan and the rest of the world. For Japan it makes imports cheaper and dilutes the effort to fight deflationary pressure. It also makes Japanese exports less competitive and could dampen growth going forward. For global markets, the tendency for the yen to appreciate would dampen “carry trades” into higher yielding markets like Indian stocks. That is the incentive to borrow yen at near-zero interest rates to fund other markets would be eroded by the risk of having to pay the loan back at a more unfavourable exchange rate.
How much will the fiscal stimulus help? Well, there’s the “nothing will ever work in Japan” camp who believe that nothing short of a miracle can turn the Japanese economy around. Then there’s the problem of the devil in the fiscal detail. Analysts fret over the actual amount of “mamisu” or fresh water in the fiscal package — actual direct spending and tax breaks in the package — and the rest that could comprise complex indirect stimuli and incentives that the Japanese government is known to use to pad up headline stimulus figures.
A purely bond-financed stimulus might not quite do the trick for an economy whose government debt to GDP ratio is close to 230 per cent. However, if it was supported by easy money, could it have done the trick or is the economy suffering from stimulus fatigue? There are a number of supporters of Mr. Abe’s 2013 stimulus of 224 billion dollars followed by a ramp-up in monetary easing in October 2014, who claim that it did pay off in reflating the economy and bringing life back to the labour markets. They claim that if the right gauge of inflation is used (unlike other economies it includes energy prices in its core index), there were signs of reflation. The problem was that more government spending was needed that did not come through. Instead it went in for a hike in “consumption tax” (fiscal contraction that undid much of the effect of stimulus).
In addition to fiscal and monetary policies, the government has now renewed its focus on structural reform, the third of the three arrows identified by Mr. Abe when he first came to power. Labour market rigidities are being addressed so that tightening labour markets can be reflected in wage increases, which will induce consumers to increase their spending. The IMF has suggested greater flexibility in workers’ contracts to encourage new hiring and income policies to ensure a steady rise in wages.
The Abe government is doing its bit to induce higher labour participation rates by encouraging women to enter and stay in the workforce. Besides providing childcare support, there are moves to make it difficult for employees who discriminate against pregnant employees. If only economic reflation and women’s empowerment could go hand in hand in more countries!
Abheek Barua is chief economist, HDFC Bank. Bidisha Ganguly is principal economist, CII
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
