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Japan: the more things change the more they stay the same

Economic Quarterly Report

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  • Q2 GDP growth was yet again a major disappointment for Japan as the economy shrank 0.3% q-o-q terms
  • Abenomics, the government strategy that aims to lift growth and inflation in Japan, really mostly amounts to currency devaluation by the central bank, which on its own will not be very successful
  • As current loose monetary policy is not able to tackle structural economic problems, such as lower household’s spending power.  

Q2 GDP growth was yet again a major disappointment for Japan. In q-o-q terms the economy shrank 0.3%, reversing the upwardly revised 1.1% increase seen in Q1. Moreover, in y-o-y terms expansion was just 0.9% despite the hugely helpful base effects provided by the collapse in consumption that was witnessed in Q2 last year alongside the increase in the Goods and Sales Tax (GST) from 5% to 8%. The details of the report were also ugly: private consumption spending dropped 0.7% q-o-q, which excluding Q2 2014’s epic 5.0% collapse was the weakest reading seen since Q1 2011; meanwhile business spending also fell 0.9% q-o-q (after a 2.6% increase in Q1).

At the same time exports also crumbled 4.4% q-o-q, again the biggest slump experienced since 2011 and underlining how much of Japan’s feeble recovery under Abenomics has relied on a weak JPY: of course GDP has to strip out the flattering price effects from a cheaper currency. Rubbing salt into the wounds, nominal GDP was almost flat q-o-q after having increased 2.1% in Q1. That should not have been a surprise given that CPI inflation dropped back to average 0.5% y-o-y in the quarter vs. 2.3% in Q1. In our previous Economic Quarterly Report, we have already explained that Abenomics, the government strategy that aims to lift growth and inflation in Japan, really mostly amounts to currency devaluation by the central bank, which on its own will not be very successful. What is surprising is that the Bank of Japan (BOJ) still states that its reflation strategy 

Monetary policy is no longer having any real long-term effect in Japan

Indeed, let’s take a step backwards in time to look at the efficacy of BOJ monetary policy. During the 1960s Japanese annual GDP growth averaged a China-like 11.0% y-o-y (or should we say China is Japan-like?). During that decade the average nominal BOJ interest rate was 6.2%, and the average real rate of interest – calculated by subtracting average annual inflation over the period – was 0.9% (see chart 1). Moving into the 1970s, average annual GDP growth slowed sharply to 5.4% y-o-y while the decade nominal interest rate was little changed at 5.9% and the equivalent real rate was negative 3.4% due to high inflation. In the 1980s GDP growth slowed even further to 4.5%, nominal interest rates edged down to 4.7%, and the real interest rate rose to 2.2% as inflation fell back again: at that point one could argue that the BOJ has as much control over the economy via monetary policy as any central bank does.

Figure 1: Monetary policy unable to push up growth and inflation
Figure 1: Monetary policy unable to push up growth and inflationSource: Macrobond, Rabobank

However, after the bursting of Japan’s dual equity and property bubbles in the late 1980s, 1990s GDP average annual growth slumped to just 1.5% y-o-y, nominal interest rates dropped again to 2.2%, and real borrowing rates followed them down to 1.0%. In the 2000s the weak economic trend continued despite looser monetary policy: average GDP growth fell to a meagre 0.6% even as interest rates averaged only 0.3% (and stayed at zero for much of the time), and the real interest rate declined to just 0.6%. In the current decade we seem to have seen a slight pick-up in GDP growth to 1.4% so far, suggesting that the BOJ’s ultra-easy policy has finally had some response. However, in truth the noughties growth figures were badly distorted by the Global Financial Crisis – looking at just 2000-07, for example, average annual GDP growth is again 1.5% y-o-y. In short, the BOJ has kept interest rates at what were until recently unprecedented lows for more than 25 years and yet has seen inflation continue to grind lower and GDP growth plateau at around 1.5% y-o-y at best: that certainly suggests that monetary policy is no longer having any real long-term effect in Japan.

Current loose monetary policy is not able to tackle structural economic problems

Meanwhile, in terms of the current BOJ policy of massive quantitative easing (QE) to supplement a zero rate policy (ZIRP), the evidence is also increasingly clear: devaluing the currency via expanding the money supply means that large Japanese exporters directly benefit as they gain in competitiveness and as their USD earnings buy more JPY at home; but domestic demand still remains weak as household incomes are hit by the weaker currency and lower spending power (also exacerbated by tax hikes from the government). Tellingly, Japan’s real cash earnings were -2.9% y-o-y in June, while real real household spending was -2.0% y-o-y in the same month (See Chart 2). That represents a structural economic problem that the BOJ is not able to tackle via ultra-loose monetary policy, although it is a problem that many other economies are also starting to experience in tandem! 

Figure 2: Weak earnings and spending
Figure 2: Weak earnings and spendingSource: Macrobond
Table 1: Japan key figures
Table 1: Japan key figuresSource: Macrobond, Rabobank

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The Economic Quarterly is a publication of Economic Research (KEO) of Rabobank and a co-production with Financial Markets Research.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

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Abbreviations for sources: CBS: Statistics Netherlands, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development, CPB: Economic Policy Analysis,  IMF: International Monetary Fund.

Abbreviations used for countries: VK: Great Britain (UK), IE: Ireland, US: United States, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, AT: Austria, FR: France, GR: Greece, BE: Belgium, FI: Finland, EZ: Euro zone, PT: Portugal.

Abbreviations used for currencies: CNY: Chinese yuan, IDR: Indonesian roepia, INR: Indian roepie, MYR: Malasian ringgit, KRW: South Korean won.

Economic Research is also on the internet: www.rabobank.com/economics

For more information, please call the KEO secretariat on tel. +31 (0)30 – 216 2666 or send an email to economics@rn.rabobank.nl

Editors-in-chief: 
Allard Bruinshoofd, head of International Research, Economic Research
Tim Legierse, head of National Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Christel Frentz

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Author(s)
Michael Every
RaboResearch Global Economics & Markets Rabobank KEO
+852 2103 2612

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