+𝜶
ABENOMICS
HOW CAN JAPANOVERCOME DEFLATION?
January,2018
PRESENTERS:EJI SASAKIYUTO ITOMASATO USHIDATAKANORI SATOSHOTO FUKUYAMAKENSHIRO KAMOEMILY CEBULA
Japan Center for Economic Research 1

TABLE OF CONTENTS
0. Current situation
The pressure to raise inflation still lacks strength.

1. 1st arrow [monetary policy]
Continuation of QQE is necessary.

2. 2 nd arrow [fiscal policy]
A basic income system is the most effective way.

3. 3 rd arrow [structural policy]- Expected Inflation rate
- Raising wages

All HIKE !

- Improvement of labor productivity4. Conclusion
2CURRENT SITUATION
・Rate of Increase in Consumer Price Index（Year over year, ％）

3.0
2.0

CPI(All Items)
CPI(less fresh food)
CPI(less food and energy)

Inflation target

・Rate of increase in CPI
In particular, the inflation rate of the CPI(lessalcoholic beverages and energy) is near zero.

1.0
0.0
-1.0
-2.0
-3.0

Jan-09From the time series the rate of increasein CPI , it can not be said that thecurrent situation is getting out ofdeflation.

Jan-10Jan-11

Jan-12

Jan-13（Annotation）Excluding consumption tax（Source） MIC『Consumer price index』

Jan-14Jan-15Jan-16

Jan-17 Sep-17（Monthly）

The Monetary Policy Meeting in Octobersummarized the new economic outlook andprice forecast and lowered the prospect ofinflation from 1.1% in July to 0.8% in 2017.
Moreover, They set the forecast for fiscal 2018from 1.5% to 1.4%.

The pressure to raise inflation
still lacks strength.
3

1st arrow MONETARY POLICY：
BOJ BAZOOKA’S CONTINUATION
・Monetary Base and 10-Year Government Bond Yields in the U.S. and Japan.
【United States】

10080（％ of nominal GDP）（％）
6Monetary base(Quarterly)
10-year government yield (RHS, Daily)
5【Japan】（％ of nominal GDP）
（％）
100
6
Monetary base(Quarterly)
10-year government yield (RHS, Daily)
580

4460

324060

3240

1120

00-1

Jan-05Jan-08Jan-11（source）Bloomberg

Jan-14Jan-1720

0

0
Jan-05-1
Jan-08Jan-11

Jan-14Jan-17

Continuation of QQE is necessary as a foundation.

4

2nd arrow FISCAL POLICY：
The Final Alchemy… “Helicopter Money”
・Call Rate, Uncollateralized Overnight/Average ・General Government Debt % of GDP
10%

250

8%

Interest rate face zero bound

6%4%

150
1002%

500%-2%Jan-90200

Jan-94Jan-98Jan-02Jan-06

Source: BOJ Time-Series Data searchJan-10Jan-140Fiscal stimulus is at the limit
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: OECD Data General government debt

Is it too late? The government and BOJ can still do something.
The answer is “Helicopter Money”.
 Helicopter money is a reliable method• The BOJ underwrites perpetual bonds, while the government
distributes money.
• Monetary finance does not necessarily lead to hyperinflation.
 What do we do?
• Due to the tendency of Japanese companies to save and not passearnings on to its workers, it is important to distribute money tocitizens.
A basic income system is the most effective way.

5

3rd arrow STRUCTURAL POLICY :EXPECTED INFLATION RATE
Realized Inflation andLong-term Expectations

Source: Reserve Bank of Australia (2017).
“Inflation Expectations in Advanced Economies”.

Inflation Expectations

Source: Bank of Japan (2017). “Outlook for
Economic Activity and Prices”.

6

HOW IT WORKS:A SELF-FULFILLING PROPHECY•

People’s mindsets have a direct impact on inflation. In otherwords, the expected rate of inflation affects the real rate ofinflation.
Inflation expectations change how workers and firms set wages
and prices.
• Acts as an indicator of the central banks’ targeting credibility (longterm).
Why the gap in Japan’s target and CPI trends?
••

•
•
•
•

A loss of credibility.
Extremely low-long term expectations.
Backward-looking behavior.

What do we do?
Push up actual inflation first. (e.g. incomes policy)•Ensure sustainability. (e.g. coordination of fiscal and monetarypolicy)•Structural reform. (e.g. retraining programs, income support, andprograms to increase labor participation)
7

3rd arrow STRUCTURAL POLICY :RAISING WAGES
Changes in nominal wages and CPI

5

A Virtuous Cycle of Wage Raises(YOY,%)

Actions to counteract
our aging and shrinking population

432
1

Increase in expected growth rate

0-1

Increases in Wages-2-3

CPI: AllItems
Nominalwages-4-5

Increase in personal consumption※Three quarter moving averagesource: Ministry of Internal Affairs and Communications,Ministry ofHealth,Labour and Welfare

2017:1

2016:1

2015:1

2014:1

2013:1

2012:1

2011:1

2010:1

2009:1

2008:1

2007:1

2006:1

2005:1

2004:1

2003:1

2002:1

2001:1

2000:1-6✓Companies raise product prices
Increase in corporate profits
83rd arrow STRUCTURAL POLICY :IMPROVEMENT OF LABOR PRODUCTIVITY
Some excellent companies have introduced
advanced technologies to improve laborproductivity.

ＯＥＣＤ working hours/person (2016)
MEX
CRI
KOR
GRC
RUS
CHL
JPN(R)
POL
LVA
ISR
LTU
ISL
IRL
EST
PRT
USA
CZE
OECD
HUN
NZL
SVK
ITA
JPN
CAN
ESP
SVN
GBR
AUS
FIN
SWE
AUT
LUX
FRA
NLD
NOR
DNK
DEU(examples)
Not all butsomevoluntaryovertime
working isincluded.

it doesn't
include all ofvoluntary
overtimework.

There is more andmore uncounted
overtime working
in Japan...
0500

1000

1500

(source)OECD『Hours worked』,MIC『Labor force survey』

2000

2500

(hours/year)

Higher labor productivity will…
reduce working hours
lead to higher wages

EVERYDAYpromote job mobility towards higher salaries

create larger demand.

9CONCLUSION：3-Point Operation !
~Monetary Policy~

MonetaryPolicy・Monetary easing measures need
to be maintained until Japan
overcomes deflation.
~Fiscal Policy~

Overcome
Deflation!
StructuralPolicy

FiscalPolicy

Each component alone is notenough.
⇒All three policies must be
implemented simultaneously anduntil the inflation target is realized.

・Expansionary fiscal policy isneeded. The fiscal policy has tobe used to link and make clear
the commitment to the inflation
target.
~Structural Policy~
・Improvement of productivity
with innovation.
・Creation of a virtuous wage
hike cycle.
・Rising inflation expectations byrealizing actual inflation first.
 Ensure sustainability
 Structural reform.

10

HOW CAN JAPANOVERCOME DEFLATION?
~PRESENTERS~EMILY CEBULA: ALL NIPPON AIRWAYSSHOTO FUKUYAMA: JAPAN FINANCE CORPORATIONYUTO ITO: DAI-ICHI LIFE RESEARCH INSTITUTEKENSHIRO KAMO: HOKKAIDO BANKEJI SASAKI: HACHIJUNI BANKTAKANORI SATO: JAPAN RESEARCH INSTITUTEMASATO USHIDA: JAPAN POST BANK11