Professor Takeo Hoshi, Professor of Economics at Stanford, about Abenomics success probability
Why did Japan stop growing after completing the catch-up with advanced countries?
Takeo Hoshi, Professor at Stanford University, who devotes his life to work on Japan’s economy at US Universities, gave a talk at the Swedish Embassy organized by the Stockholm School of Economics on Monday, October 21, 2013 entitled:
Will Abenomics restore Japan’s growth?
Outline:
- What is Abenomics?
- Will Abenomics restore growth?
- Why did Japan stop growing?
- Will Abenomics succeed in regenerating growth?
Summary – Abenomics success probability:
Professor Hoshi explained that Abenomics is essentially nothing new, its the classical response for a Government to take a country out of recession. However, monetary policy cannot restore growth – in order to restore growth structural reform is needed.
Why did Japan stop growing? Until 1990-1995, Japan was in catch-up mode, catching up with the more technologically and economically advanced Western countries, like European countries and US. Catching up was relatively straightforward, because Japan’s Government could look which industries were most successful and most important in US and Europe, e.g. car industry and electronics industry, and steel making, and then implemented these industries in Japan. However, as soon as Japan had reached the same stage of development as Western countries, Japan’s economic growth stopped, because different methods were necessary, and they seem to be lacking in Japan. So Japan stopped growing around 1990-1995, and has not grown since.
Growth strategy is the “third arrow” of Prime Minister Abe’s Abenomics. Professor Hoshi explains that a growth strategy is nothing new, but every Japanese Government of recent years had a growth strategy, but nothing happened because the implementation did not happen – implementation is the key. Abenomics’ “third arrow” lists more than 100 growth areas, however, Professor Hoshi sees a lack of priorities, too much Government directionalism, and a lack of strong Key Performance Indicators (PKI’s).
When asked during Q&A how high Professor Hoshi estimates the chances for the success of Abenomics, Professor Hoshi said that he estimates that the probability for success of Abenomics is about 12%, and the probability of failure is about 88%. The most likely scenario according to Professor Hoshi is that something similar will happen as under Prime Minister Koizumi, about 1% economic growth
What is Abenomics:
Three arrows:
- Expansionary monetary policy
- Flexible fiscal policy
- Growth strategy
Prime-Minister Abe replaced Shirakawa by Kuroda as Governor of the Bank of Japan, who introduced quantitative and qualitative easing, and an inflation target of 2% within 2 years in order to overcome “deflation” (which in Japan can have two distinct meanings, see below).
Fiscal Stimulus:
Fiscal stimulus was provided by supplementary budgets, financed by new Government bond issues.
Fiscal consolidation plan:
The medium term fiscal consolidation plan aims to:
- reduce the budget deficit to 3.3% of GDP by FY2015, to half the level of FY2010, and
- to eliminate the budget deficit by FY2020.
If the 2013-2022 economic growth rate is 3.4% per year, 1. (reduction of budget deficit 10 3.3% by FY2015) will be achieved, but 2. (elimination of budget deficit by FY202) will not be achieved.
If the 2013-2022 growth rate is 1.3% per year, neither 1. nor 2. will be achieved.
Growth strategy
The “Japan revitalization strategy” (JAPAN IS BACK) was approved by the cabinet on June 14, 2013, and provides:
3% average nominal economic growth
2% average annual real growth
YEN 1.5 million increase in nominal national income per person
Three action plans:
- Industry revitalization plan
- Strategic market creation plan
- Strategy of global outreach
Overcoming “deflation”?
Abenomics aims to overcome “deflation”. Deflation really has two meanings:
- Falling prices, because of low demand for goods and services
- Economic stagnation in combination with falling prices
In Japanese policy discussions, usually “deflation” has the second meaning – thus its important to restore growth in order to eliminate “deflation”.
Is Abenomics new?
Not really. It is the standard policy to get out of recession and to restore growth. Its a combination of demand policy and a supply side policy for growth. What is new in Japan is that until Abenomics, the Bank of Japan did not expand aggressively, and it could be new in Europe, where fiscal austerity is a problem.
Why did Japan stop growing?
Mainly because Japan’s catch-up phase with Western countries has been a success, and Japan reached the same level of technology and economic development as Western countries around 1990-1995. The catch-up was straightforward by imitating in combination with lower wages. As soon as Japan reached the same level of development as Western countries, Japan’s economic growth stopped.
However, US and UK and other Western countries continue high growth of GDP even at high levels of economic development, while Japan does not.
Why does Japan grow much less than US, EU and other Western countries?
- Because Japan’s population is aging more rapidly than Western countries, because of lower fertility rates and lack of immigration
- Because the export led growth has reached its limits, and internal growth would be necessary
- Because Japan’s Government make policy mistakes:
- Japan’s Government protects zombie companies, that hurt allocation of capital and productivity
- Regulatory policies impaired productivity growth
- Macroeconomic policy mistakes
Will Abenomics restore Japan’s economic growth?
Fiscal policy cannot restore economic growth, only structural reform can – thus Abenomics’ “third arrow” is the important one.
Japan revitalization strategy – too many areas, too little focus, fuzzy Key Performance Indicators (KPIs)
Prime Minister Abe’s revitalization strategy has three action plans:
- Industry revitalization plan
- Strategic market creation plan
- Strategy of global outreach
Regulatory reform aims to reduce the costs of doing business, to stop protecting zombies, and “special zone” policies.
Trade agreement talks are held with under the TPP program and with the EU to open up Japan’s economy to global competition.
Macroeconomic policies aim to stabilize the Japanese Government debt and to stop “deflation”.
According to Professor Hoshi, the Prime Minister Abe’s Revitalization Strategy has around 150 different action areas, and some of them are very good ideas, but others are terrible.
In particular Professor Hoshi criticizes that there are far too many action areas, and there is a lack of clear priorities and a lack of focus. It would be better to select fewer priority areas, and take strong effective action in these most important areas.
Professor Hoshi also sees a return to Government selection of “winning industries”. Unlike the time, when there was no internet, and when growth was a matter of copying the US or UK, Government today is in no better position than private industry to know which industries are which are likely to be the winners of the future.
One of the worst examples is the “Cool Japan” initiative: as soon as the Government supports anything, its not “cool” anymore, says Professor Hoshi.
Abenomics- Lack of strong Key Performance Indicators (KPI): only 19% of reform areas have any numerical KPI within 5 years
Growth strategies need clear numerical Key Performance Indicators (KPIs) – for many areas there are no KPIs at all, for others the KPIs are fuzzy and ill-defined (e.g. “Japan will become the most innovative country in the world”), or the KPI target date is so far in the future, that it is irrelevant for the current Prime Minister or the current Government, e.g. 2020.
Of 52 reform areas in the Government’s growth strategy program:
- 10 areas have no KPIs at all, i.e. the Government cannot measure if any progress is achieved at all in these areas
- Only 10 of 52 areas (only 19%) have any numerical KPI within 5 years.
- In many cases the KPIs are ill-defined and fuzzy: e.g. “Japan to become the most innovative country in the world”, or target dates in 2020, i.e. irrelevant and out of the responsibility of the current Government and the current Prime Minister
Special zones – risk to redistribute economic activity geographically within Japan with zero net effect.
Special zones where regulations and approval conditions are relaxed are ideas which have been floated for a long time in Japan. The disadvantage of “special deregulated zones” is that economic activity is just redistributed in Japan, moving from regulated zones to deregulated “special zones” with zero net effect on Japan’s economy, or even increasing the total cost of doing business in Japan.
Abenomics – Reheated pizza?
In conclusion of his talk, Professor Hoshi showed the following slide, which shows the vision of a transition from present Japan (left) to the Japan of the Future (right):
The image of this slide is from Prime Minister Koizumi’s revitalization plan of 2001, i.e. 12 years ago. Professor Hoshi uses this slide to make the point that in his view not much has changed since 2001, that Prime Minister’s Abe’s revitalization plan is not very different from Prime Minister Koizumi’s revitalization plan 12 years ago, and he remains skeptical of Abenomics and its chances for success.
Abenomics success – Q & A
Q. What is the probability for Abenomics to succeed?
A. I was asked this question previously and from the top of my head I instinctively answered that Abenomics has about 10% probability to succeed. I got intrigued, and sat down to work through a decision tree of different policies, and the result was: Abenomics has 12% probability to succeed, and 88% probability of failure
Q. What do you think is the most likely scenario?
A. Something like what happened under Prime Minister Koizumi. About 1% economic growth, but not 2%-3%
Q. Management of Japanese companies?
A. Many major Japanese companies pile up too much cash, should invest more, and pay more to shareholders.
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