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Japan's QE will leave its workers out of pocket with lower quality of life Japan's QE will leave its workers out of pocket with lower quality of life
(6 months later)
Japan's central bank has announced a policy of what is describes as a massive increase in creating money, in the hope of ending a generation of economic stagnation. The local stock markets have soared after the announcement from the Bank of Japan (BoJ) and the yen has once more weakened sharply against the currencies of major trading rivals in Asia and in Europe.Japan's central bank has announced a policy of what is describes as a massive increase in creating money, in the hope of ending a generation of economic stagnation. The local stock markets have soared after the announcement from the Bank of Japan (BoJ) and the yen has once more weakened sharply against the currencies of major trading rivals in Asia and in Europe.
Desperate times call for desperate measures. Japan has suffered 24 years of low growth and outright falls in prices. When the bubbles in the stock market and in land prices burst in 1989, Japan was the second largest economy in the world and had been closing rapidly on the lethargic US economy. Now, it is a fraction of the size of both the US and euro-area economies. It has also long been surpassed by its former colony of China, which is due to be the world's largest economy in three to five years.Desperate times call for desperate measures. Japan has suffered 24 years of low growth and outright falls in prices. When the bubbles in the stock market and in land prices burst in 1989, Japan was the second largest economy in the world and had been closing rapidly on the lethargic US economy. Now, it is a fraction of the size of both the US and euro-area economies. It has also long been surpassed by its former colony of China, which is due to be the world's largest economy in three to five years.
Economic stagnation matters. In a capitalist economy the distribution of national income does not remain static even if aggregate economic activity is unaltered. National debt has ballooned. Far from Keynes' recommendation of the "euthanasia of the rentier", increased public debt puts the finance sector on life support. At the same time, formerly world-leading companies such as Sharp, Sony and Panasonic are in crisis, unable to match competition from South Korea, China and elsewhere. Living standards have fallen dramatically as women and young people are increasingly excluded from the workforce and real wages have fallen. Japan's recent history also refutes the idea that an era of zero growth will prevent economic calamity. Not only have there been repeated nuclear disasters, but per capita CO2 emissions have risen while economic activity remains in the doldrums.Economic stagnation matters. In a capitalist economy the distribution of national income does not remain static even if aggregate economic activity is unaltered. National debt has ballooned. Far from Keynes' recommendation of the "euthanasia of the rentier", increased public debt puts the finance sector on life support. At the same time, formerly world-leading companies such as Sharp, Sony and Panasonic are in crisis, unable to match competition from South Korea, China and elsewhere. Living standards have fallen dramatically as women and young people are increasingly excluded from the workforce and real wages have fallen. Japan's recent history also refutes the idea that an era of zero growth will prevent economic calamity. Not only have there been repeated nuclear disasters, but per capita CO2 emissions have risen while economic activity remains in the doldrums.
British policymakers have more reason than most to learn from Japan's bold monetary moves. George Osborne threatens austerity policies to last until 2018 and the Office for Budget Responsibility always forecasts recovery two years away. Britain is facing its own lost decade.British policymakers have more reason than most to learn from Japan's bold monetary moves. George Osborne threatens austerity policies to last until 2018 and the Office for Budget Responsibility always forecasts recovery two years away. Britain is facing its own lost decade.
Any prescription needs to based on a diagnosis of the ailment. The primary cause of Japan's long crisis is a fall in investment. In cash terms the Japanese economy has fallen by ¥53tn from its peak, a fall of 10%. The decline in productive investment on the same basis is almost exactly the same at ¥54tn. The slump in investment accounts for the entire fall in nominal GDP. Because of deflation the economy has not declined in real terms, but instead has grown at a snail's pace. The investment strike by Japanese firms has led to their hollowing out and a hollowing out of the entire economy. This explains why the electronics giants and others are in crisis.Any prescription needs to based on a diagnosis of the ailment. The primary cause of Japan's long crisis is a fall in investment. In cash terms the Japanese economy has fallen by ¥53tn from its peak, a fall of 10%. The decline in productive investment on the same basis is almost exactly the same at ¥54tn. The slump in investment accounts for the entire fall in nominal GDP. Because of deflation the economy has not declined in real terms, but instead has grown at a snail's pace. The investment strike by Japanese firms has led to their hollowing out and a hollowing out of the entire economy. This explains why the electronics giants and others are in crisis.
Radical monetary policy does not address the investment strike. Instead, its first effect is to increase the price of financial assets, stocks, bonds and perhaps even property prices. There is a hope that it will also lead to a persistently weaker yen, which would make Japan's exporters more competitive. This is not guaranteed, as speculative money also flows into Japan precisely because of rising financial asset prices. But currency devaluation alone can only ever be a beggar-my-neighbour policy, and advanced industrialised countries like Japan cannot sustainably compete on price. They are forced to compete on quality and value-added, which requires investment.Radical monetary policy does not address the investment strike. Instead, its first effect is to increase the price of financial assets, stocks, bonds and perhaps even property prices. There is a hope that it will also lead to a persistently weaker yen, which would make Japan's exporters more competitive. This is not guaranteed, as speculative money also flows into Japan precisely because of rising financial asset prices. But currency devaluation alone can only ever be a beggar-my-neighbour policy, and advanced industrialised countries like Japan cannot sustainably compete on price. They are forced to compete on quality and value-added, which requires investment.
It is a stated aim of policy to generate consumer price inflation. Yet no Japanese policymaker is proposing that wages should have a matching rise. If the policy is successful it will be highly damaging to living standards as inflation eats away at pay levels. A combination of increased asset prices, lower real wages and a weaker currency will boost profits. This is the real aim of policy, following the sudden lurch lower of Japanese profits in 2011.It is a stated aim of policy to generate consumer price inflation. Yet no Japanese policymaker is proposing that wages should have a matching rise. If the policy is successful it will be highly damaging to living standards as inflation eats away at pay levels. A combination of increased asset prices, lower real wages and a weaker currency will boost profits. This is the real aim of policy, following the sudden lurch lower of Japanese profits in 2011.
Japan turned sharply right in its recent general election, and the new government has appointed one of its own to lead the BoJ. Economic policy has also turned right in order to boost Japanese capital at the expense of both competitors and the domestic workforce. No doubt, policy makers in Britain and beyond are watching carefully.Japan turned sharply right in its recent general election, and the new government has appointed one of its own to lead the BoJ. Economic policy has also turned right in order to boost Japanese capital at the expense of both competitors and the domestic workforce. No doubt, policy makers in Britain and beyond are watching carefully.
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