Abenomics: Will it Work for Japan and the Region? · Spillovers from Abenomics have been modest so far…. Japanese trade balance has worsened Supply chain effects are significant

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.


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


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


-‐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

Documents

Abenomics: Will it Work for Japan and the Region? · Spillovers from Abenomics have been modest so far…. Japanese trade balance has worsened Supply chain effects are significant