Generation 40s – 四十世代

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The beginning of Japan’s third lost decade

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South China Morning Post
Comment›Insight & Opinion

Dan Steinbock

Dan Steinbock says the effects of Japan’s massive monetary gamble will have consequences not just at home and in Asia, but globally too

Japan’s fiscal discipline is worsening. In the coming years, the consequences will be felt in Japan, the region and worldwide. In the past quarter, the economy fell into recession. In the West, it was characterised as “unexpected”, but the realities are precisely the reverse.

With its third “lost decade”, Japan has entered an era of huge monetary expansion that it not well supported by the fundamentals of its economy.

Any premature exit from more fiscal stimulus and monetary easing will backfire. So Tokyo plans to resolve its money troubles by adding to its debt.

In the three months to September, Japan’s gross domestic product contracted by an annualised 1.6 per cent as a result of the sales tax rise in April. Consumption accounts for about 60 per cent of the economy, but it remains fragile.

When household assets rose to a record in June, Prime Minister Shinzo Abe’s Liberal Democratic Party called it a sign of successful reforms. Yet, the 3 per cent tax rise and the Bank of Japan’s historical easing boosted living costs faster than incomes.

A year ago, there was much talk that “Japan is back”. But even though the yen has fallen 13 per cent against the dollar, exports added only 0.1 per cent to GDP, which has been driven by public spending.

What next? In public, Abe and his party will take a step back and seek electoral support for new rounds of fiscal stimulus and still more liquidity in the economy. Politically, Abe has called an early election and delayed the proposed second sales tax rise.

After two lost decades, Japan began a risky monetary gamble when Abe and the LDP returned to power. The central bank pledged to begin open-ended asset buying, hoping to inject US$1.4 trillion into the economy in only two years, while doubling the monetary base to 270 trillion yen (HK$17.7 trillion). The monetary gamble went hand in hand with Abe’s reform agenda of renewed fiscal stimulus, aggressive monetary easing and proposed structural reforms.

Japan’s sovereign debt is close to 250 per cent of GDP. But Japanese institutions are joining in the gamble, too. Last month, the Government Pension Investment Fund, controlling 67 million people’s retirement income, said it would take more aggressive bets by reducing funds in domestic bonds while pumping up its investments in stocks; the BOJ said it would boost its asset-buying programme by a third and buy stocks and real estate funds, not just more government bonds. That blurs the very notion of risk.

As the BOJ is underwriting the politicians’ huge borrowing, it is eroding the credibility of public finance in Japan and the perceived independence of the central bank. Yet, days before the third-quarter report, stocks soared to seven-year highs, buoyed by expectations of the sales tax rise deferral.

Some months before the latest rounds of debt-taking, Japan had a 70 per cent share of Asia’s debt stock. By the same token, what happens in Tokyo will not stay in Tokyo. As Japan moves into deeper fiscal deterioration, the repercussions are likely to be eventually felt in Asia, and globally.

Dr Dan Steinbock is research director of international business at India China and America Institute (US) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).


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