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Transcript

Presentation

How Japan fights against deflation?

Clément Jucobin, Sarah Cariou

A deflationary mindset

"Young Japanese people have been born in a life of carrying the recognition that prices either will be constant or decline"

HAHURIKO KORUDA

The bursting ofthe bubble in the 80's

+ Info

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Rudderless economy

Unclear and worrying outlook for the future

Not spending

Constant need to save

Deflationary Spiral

- A gain in the purcharsing power of money (general and lasting decrease in prices)


--> Leads to Wait-and-see effects on economic agents

--> Deflation VS Disinflation

Deflation

+ INdicators


Monetary policies

Budgetary policy

Good and bad effects

How successful has Japan been in fighting deflation?


I. The analysis of the economic situation and the measures put in place to fight against deflation by Japan

II. The critics of Japanese decisions and the lessons which other countries have learned from it



Analysis of the economic situation and measures put in place to fight against deflation

I

- Sets its target short-term rate at or near 0%


- Helps to stimulate economic activity as it allows for more low-cost borrowing and better access to cheap credit

Zero interest rate policy

+ Fisher equation

  • Decided to pursue a ZIRP from 1999


  • Lower its short-term interest rate from 6% to 0,5%


  • Japanese interest rates on Japanese six-month treasury bills became negative, yielding an interest rate of 0,004 %


Liquidity Traps


According to Paul Krugman this a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near 0.


" If one uses even a conservative estimate of Japanese potential growth since 1990 - say, 2 percent - the economy now appears to be a very deep slump indeed "

- According to Richard Werner it consists in a massive purchase of financial assets by the central bank which makes it possible to boost economic activity.

QUANTITATIVE EASING

  • Decided to implement QE from 2001 to 2006


  • The central bank increased the stock of excess bank reserves by purchasing government bonds on the market until 2005.


  • Did not have the expected effects and had no significant impact


  • Once again on the path of re-inflation and suspending quantitative easing.


In

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Data from the World Bank

The 2008 crisis

+ Info

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Jun Saito :


Japan would particularly hard hit as a global fall in demand would heavily damage the export based economy

Again pursue a policy of quantitative easing but with an added qualitative element

Shinzo Abe’s re-election

The QQE was thought to :

- Flattent the yield curve


- Bring interest rates to their lowest

Which would have :

- Increased investment


-Enlarged foreign portfolio
- Increased the inssuance of corporate bonds

-Depreciated the yen to allow for increase exports

Increase its monetary base by 60/70 trillion Yen a year

+ Info

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"Shock and Awe"

2013

shift focus to yield control by 2016

Purchase 10 year JGB to fix the rate at 0%

ThE Goal of QQE

Was to :

- Lower interest rates


- Increase the issuance of bonds

- not be issued at such a low rate if there were no expectations for inflation

Governor Koruda :

- Overshooting commitment


- Forward guidance for policy rates

- Stimulus package to increase economic activity


- 10,3 trillion yen in 2012 alone

- However policy would change and Japan would try to control its finances

- Higher taxes hurt demand

- Increase in consumption taxes
( 5 -> 8 -> 10% )


Fiscal Policy

  • Decided to implement QE from 2001 to 2006


  • The central bank increased the stock of excess bank reserves by purchasing government bonds on the market until 2005.


  • Did not have the expected effects and had no significant impact


  • Once again on the path of re-inflation and suspending quantitative easing.


Structural reform

Why did Japan need them :

- Poor demand due to :


  • Lagging productivity
  • Ageing population
  • High regulation

- Adressing these problems would help prevent deflation in the long run

Proposed reforms :

- "Womenomics"


  • Encouraging them to work
  • Augmenting the work place

- Improving conditions for part-time workers

+ Info

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Datas from the World Bank

Criticism of Japan's decisions and lessons learnt

II

The Good

- Employment did increase


- Corporate profits were record high

- Inflation started to rise again


The Bad

The Ugly

- Things are still a matter for debate


- Scott Sumner thinks that QQE was not used enough

- Hideo Hayakawa thinks that QQE was a "failed experiment"

Evaluation of monetary policies

o

Ifo

- Prolonged usage hurt banks and investors


- Corporate profits did not translate into wage increases and so did not increase demand



Looking back on fiscal policy

- Fiscal policy would blunt the budget deficit

- Fiscal policy became detached from antideflation policies

- Alongside a depreciating Yen , export did increase

Failures of structural reforms

- Many believe that reforms were only aesthetic

- Richard Katz determined that Abe did not provide the far reaching reforms that Japan needed

- Matthew Lichtblau believe that Japan completely failed to implement any reforms

- Denied the seriousness of the financial crisis, allowed banks to hide their losses


Result : Deflation spread throughout the economy

- Bank of Japan took several years before lowering its key rate

Comparison : The Fed cut its policy rate by more than 3 percentage points in 6 months

To act or not to act

Lessons learnt by other countries

  • Decided to implement QE from 2001 to 2006


  • The central bank increased the stock of excess bank reserves by purchasing government bonds on the market until 2005.


  • Did not have the expected effects and had no significant impact


  • Once again on the path of re-inflation and suspending quantitative easing.


- Many countries has been inspired by the QQE policies of Japan


Example : Quantitative easing policy implemented in the United States played a key role in managing the crisis, even if it was insufficient to stop it.

Infinite capacity to expand its balance sheet

Lessons learnt by other countries

  • Decided to implement QE from 2001 to 2006


  • The central bank increased the stock of excess bank reserves by purchasing government bonds on the market until 2005.


  • Did not have the expected effects and had no significant impact


  • Once again on the path of re-inflation and suspending quantitative easing.


To conclude :

  • It is complex to explain how Japan fought against deflation

  • The approach was mostly monetary :
      • Quantitative and Qualitative Easing

  • What was done was not enough !
  • Act on the fiscal front and more importantly tackle the structural problems
  • As inflation is rising this year in Japan, one can wonder how the situation will change.


Thanks!