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Abenomics: Will it Work for Japan and the Region?
Dennis Botman
Deputy Division Chief Asia and Pacific Department International Monetary Fund
Increasing uncertainty whether Abenomics will work… We still see the glass as half full… But more is needed from the Third Arrow to overcome structural headwinds, Which would also benefit the region.
Abenomics: from where to where? What is the right benchmark?
Fiscal policy (stimulus, consumption tax)
Monetary policy (2 percent inflation, QQE)
Growth reforms (TPP, Diet session)
Inflation
Recovery, Fiscal sustainability
Higher growth
Where are we? What’s next?
Initiates recovery, growth becomes self-sustained. Over time
deficit and debt ratio decline
Inflation expectations rise, portfolio rebalancing picks up, core inflation
starts rising
Investment recovery, employment and wages rise,
labor supply and productivity increase
GHE: Consumption contracted unexpectedly in July GHF: But wages and hours worked are rising
94
96
98
100
102
104
106
108
Oct Nov Dec Jan Feb Mar Apr May Jun Jul
2014: from 5 to 8 %
1997: from 3 to 5 %
Private consumption before and after the tax increase(Monthly index; October = 100)
Source: Cabinet Office / Haver Analytics.
Consumption tax rate increase
Before After
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14
Total compensation(in percent, yoy)
Regular employment BonusesOvertimeBase wageTotal compensation
Source: Ministry of Health, Labour & Welfare / IMF staff calculations.
GHE: Firms are investing, just not in Japan GHF: But domestic investment is rising also
0
200
400
600
800
1000
1200
02Q1 04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Overseas investment (SA, Bil. Yen) 1/
Source: Quarterly survey of overseas subsidiarie, METI.1/ Acquisition of tang ible fixed assets by overseas
90
92
94
96
98
100
102
104
106
85
90
95
100
105
110
115
120
125
130
00Q1 02Q1 04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Investment and production capacity (2010=100)
Real investment in plant and equipmentProduction capacity (RHS)
Source: CAO / METI / IMF staff calculations
GHE: Despite depreciation, exports remain flat GHF: But this reflects typical lags
70
90
110
130
Aug -‐09 Aug -‐10 Aug -‐11 Aug -‐12 Aug -‐13 Aug -‐14
Real exports
Real imports
Real Exports and Imports(SA, 2010 = 100)
Source: Bank of Japan / Haver Analytics
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
t t+4 t+8 t+12 t+16
Period of Yen depreciation and the trade balance (% GDP, depreciation magnitude in parenthesis)
88Q4-90Q2 (23%) 95Q2-97Q1 (32%)99Q4-02Q1 (21%) 04Q4-07Q2 (23%)12Q3-13Q4 (24%)
Note: t indicates quarter of onset of Yen depreciation period.Source: Bank of Japan / IMF staff calculations
GHE: Inflation gains largely reflect yen depreciation GHF: But inflation expectations have risen
Sep-‐12 Dec-‐12 Mar-‐13 Jun-‐13 Sep-‐13 Dec-‐13 Mar-‐14 Jun-‐14 Sep-‐14-‐0.5
0
0.5
1
1.5
2
2.5
-‐0.5
0
0.5
1
1.5
2
2.5Quick Survey 10YInflation-‐Swaps 10YConsensus Forecasts 10YInflation-‐Swaps (8-‐10Y)Break-‐even rate 10Y JGBs
Long Term Inflation Expectations (In annual percentage points)
Source: Bloomberg, Quick Survey, Consensus Forecasts, and IMF estimates.
-‐2
-‐1.5
-‐1
-‐0.5
0
0.5
1
1.5
2
Jan-‐20
13
Feb-‐20
13
Mar-‐201
3
Apr-‐2
013
May-‐201
3
Jun-‐20
13
Jul-‐2
013
Aug-‐20
13
Sep-‐20
13
Oct-‐201
3
Nov-‐201
3
Dec-‐201
3
Jan-‐20
14
Feb-‐20
14
Mar-‐201
4
Apr-‐2
014
May-‐201
4
Jun-‐20
14
Jul-‐2
014
Aug-‐20
14
Headline Inflation
Sub-‐basket less sensitive to exchange rate
Inflation Developments(y/y percent change excluding the consumption tax)
Core Core inflation (excl. food and energy)
GHE: Portfolio rebalancing is not happening GHF: But credit growth is rising
-‐4
-‐2
0
2
4
-‐4
-‐2
0
2
4
0 10 20 30 40 50 60
Historical fluctuation (2 Std Dev)
Share of Currency, Deposits, and Government Securities
2012
-‐14Cha
nge in Sha
re
Corporate Pensions
Banks
Other Financial Intermediaries
Public Pensions
Insurance
Households
Rebalancing
Source: Bank of Japan Flow of Funds, Haver, and Staff Estimates
Currency, Deposits & Government Bonds Holding s (Jun-‐2014)(In percent of total portfolio)
-‐5
-‐4
-‐3
-‐2
-‐1
0
1
2
3
4
5
Jul-‐09 Jul-‐10 Jul-‐11 Jul-‐12 Jul-‐13 Jul-‐14
TotalLarge corporationsSMEsIndividuals
Japan Domestic Bank Lending (Year-‐on-‐year percent change)
Source: CEIC Asia database.
GHE: Growth remains modest GHF: But above potential despite fiscal adjustment
-‐1
0
1
2
3
2012 2013 2014 2015 2016 2017 2018 2019
Net exportsGovernment spendingPrivate inventoriesPrivate g ross fixed investmentPrivate consumptionGDP g rowth
Components of GDP g rowth(In percent)
Source: IMF staff estimates
Measures needed to boost labor supply…
Addressing Structural headwinds
-‐1
0
1
2
3
4
5
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Labor input
Capital stock
Total factor productivity
Potential g rowth rate
Potential Annual Growth Rate(In percent)
Source: CAO, Bank of Japan, IMF staff estimates
AUS
AUT
CAN
CZE DNKFIN
FRA
DEUGRE
HGR JPNKOR
NOR
SLV
ESP
CHE
GBR
USA
-‐5
0
5
10
15
20
25
30
50 55 60 65 70 75 80
Share of Fo
reign Lab
or
Female Labor ParticipationSource: OECD.
Immig ration and Female Labor Participation(In percent)
… and reduce labor market duality
0%
10%
20%
30%
40%
50%
60%
70%
80%
-‐
100
200
300
400
500
600
700
Real estate
Electricity
, gas, h
eat s
upply an
d water
Gove
rnmen
t, n.e.c.
Fina
nce an
d insu
ranc
e
Services, n
.e.c.
Man
ufacturin
g
Tran
sport
Cons
truc
tion
Inform
ation an
d co
mmun
ications
Who
lesale and
retail trad
e
Med
ical, h
ealth
care an
d welfare
Eatin
g an
d drinking
places,
acco
mmod
ations
Educ
ation, le
arning
sup
port
J apan: Labor Market Duality and Productivity by Economic Sector
Productivity* (LH S)
Share of Non-‐reg ular
*Productivity is measured by amount of value-‐added divided by number of workers.Source: Mizuho Research Institute, Ministry of Internal Affairs and Communications; IMF staff calculations.
Addressing Structural headwinds
27
29
31
33
35
37
-‐3
-‐2
-‐1
0
1
2
2001 2003 2005 2007 2009 2011 2013
Changes in part-‐ time wages
Composition effect
Change in full-‐ time wages
Share of nonregular workers (right side)
(% year-‐over-‐year) (% of staff)
Sources: Haver Analytics; and IMF staff estimates
Nonreg ular Workers and Wage Growth
Corporate governance and tax reform could support investment
Addressing Structural headwinds
0
20
40
60
0
20
40
60
Ireland
Turkey
Switz
erland
Swed
en
United King
dom
Korea
OEC
D Ave
rage
Greece
Can
ada
Italy
New
Zea
land
Norway
Australia
Mexico
Spain
German
y
Portug
al
Fran
ce
Japa
n
United States
2013 2000 1990
Source: OECD
CIT Statutory Rate: Selected OECD Economies (In percent)
20
30
40
50
60
70
100
150
200
250
300
350
1992 1995 1998 2001 2004 2007 2010 2013
Level
In % of GDP (RHS)
Japan: Corporate Sector Retained-‐earning s (In Trillion Yen)
Source: Japan Cabinet Office / Haver Analytics
Product and services liberalization could support competitiveness
Addressing Structural headwinds
-‐1
0
1
2
3
Canada 1988 – 98
Sweden 1989 – 99
Finland 1987 – 97
Netherlands 1982 -‐ 92
New Zealand 1985 – 95
Labor Total factor productivity Capital Increase in GDP growth
Growth Accelerations and Sources of Increase(Percentage difference in potential g rowth rates over a decade)
Source: Organization for Economic Cooperation and Development (2010); and IMF staff estimates.
Confirm c-tax increase and adopt concrete MT plan to create fiscal space
Restoring Fiscal
Sustainability
-‐12
-‐10
-‐8
-‐6
-‐4
-‐2
0
2
4
150
200
250
300
2005 2010 2015 2020 2025 2030
Gross debt (LHS): Fiscal adjustment scenario3/
Japan: Gross Public Debt1/ and Fiscal Balance(In percent of GDP)
Sources: Cabinet Office; and staff estimates and projections.1/ Gross debt of the general government including the social security fund.2/ Withdrawal of fiscal stimulus and consumption tax increases to 10 percent in 2015 are assumed. 3/ Policy adjustment scenario assumes a 8.5 percent of GDP improvement (baseline scenario+ 6¼ points) in the structural primary balance between 2015 and 2020.
Gross debt (LHS): Baseline scenario2/
Fiscal balance (RHS): Baseline scenario2/
Third Arrow needed for stronger monetary policy transmission
Ending Deflation
0
10
20
30
40
50
60
0
50
100
150
200
250
300
350
Dec-‐12 Dec-‐13 Dec-‐14
Japanese government bondsCommercial paperCorporate bonds Exchange-‐traded fundsReal Estate Investment TrustsLoan support prog ramOtherMonetary base in percent of GDP (RHS)
Source: Bank of Japan.Projections
Monetary Base Targ et and Balance Sheet Projections(Trillion yen (on left side) and in percent of GDP (on right side))
13%
20%
46%
0
10
20
30
40
50
60
600 650 700 750 800 850 900 950 1000 1050
Apr-‐13
Apr-‐14
Dec-‐19
BoJ's Share of the JGB Market if QQE Continues in Its Current Form
Outstanding JGBs
BoJ's
share
Source: IMF projections.
Abenomics and the Region
.
Spillovers from Abenomics have been modest so far….
Japanese trade balance has worsened Supply chain effects are significant Net capital flows to Japan have been positive.
The impact is likely to increase in the period ahead...
Supply-chains are reducing the effects of yen depreciation
0%
5%
10%
15%
20%
CHN
IND
IDN
KO
R
TWN
THA
Imports Contents from Japan for Gross
Exports Manufactures
High/medium high tech
ICT (info and comm tech) Low/medium low tech
No noticeable pick up in capital outflows so far, but could rise amid US tapering
0
20
40
60
Reserves loss 1/ Potential to EM Asia
IndonesiaMalaysiaPhilippinesThailandVietnamSingapore
Japan: Potential capital flows to EM Asia(In billion US dollars)
1/ Reserves loss in ApriAug (Indonesia, Malaysia, Philippines, Thailand, India), Apr-‐Jul (Vietnam), and Apr-‐May (Singapore) in 2013.Source: Haver and CEIC databases, IMF staff estimations
0
200
400
600
Passive 1 1/ Passive 2 1/ Active
Past trend
Additional flows to AEs
Additional flows to EMs
Japan: Potential capital outflows(In billion US dollars)
1/ 2 and 1.5% returns assumed under scenarios 1 and 2 respectively.Source: Haver Analytics and IMF staff estimations.
Japanese banks are increasingly going abroad
0
1
2
3
0
1
2
3
Dec-‐05 Dec-‐06 Dec-‐07 Dec-‐08 Dec-‐09 Dec-‐10 Dec-‐11 Dec-‐12 Dec-‐13
Asia USEuropean periphery 1/ Core Europe 2/Total foreign claims
Consolidated Foreig n Claims for Japanese Banks(In trillion US dollars)
Source: BIS.1/ Includes Greece, Ireland, Italy, Portugal, and Spain.2/ Includes Germany, France, UK, and Switzerland.
Foreign direct investment has reached pre-crisis levels with a focus on Asia
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009 2010 2011 2012 2013
Asia North AmericaCen/Sou America OceaniaEurope Middle EastAfrica
Japan: Outward FD I(In trillion Yen)
Source: Bank of Japan
0
1
2
3
4
2005 2006 2007 2008 2009 2010 2011 2012 2013
China Hong Kong Indonesia IndiaKorea Malaysia Philippines SingaporeThailand Taiwan Vietnam Others
Japan: Outward FD I to Asia (In trillion Yen)
Source: Bank of Japan
A complete and successful Abenomics would generate positive spillovers, including through lower fiscal risks.
Thank you