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What the Japanese Economy Can Teach the US

Courtesy of ZeroHedge. View original post here.

The Guardian reports that Japan's economy during the second quarter of 2017 expanded at the fastest pace in its six-consecutive quarter growth span. The approaching 2020 Tokyo Olympics and low unemployment levels encourage business investments.  

This information is a boost in morale amid the rising regional tension caused by the war of words between President Trump and Kim Jong-un. The tension between the two leaders rattled global stock markets and could threaten the economy of many countries.

Prime Minister, Shinzo Abe, championed a massive money printing program in an attempt to counter decades of sluggish growth. The program is meant to stimulate bank lending, company investments, and consumer buying.

The most compelling factors in the recent growth are the result of low unemployment and consumer spending that has significantly accelerated. Wages have increased and the country's growth has exceeded economists' predictions.

The focus of Japan's government and central banking is a threefold approach.

·         Monetary policy stimulus

·         Fiscal policy boost

·         Reforms in supply-side to support and raise labor market productivity.

Fiscal Policy Boost

The intended result of spending on things such as infrastructure is a financial boost to the economy. At the same time, the government is trying to rein in its budget deficit. It is also attempting to curb welfare spending and raise taxes to balance government outgoings by 2020.

Monetary Policy

The Council for Foreign Relations calls the Japanese monetary policy 'a gigantic experiment.' The Prime Minister continues to promote a suite of policies meant to jolt the country's stagnating economy out of a deflationary malaise.

His approach is referred to as 'Abenomics.' It is a combination of structural reform, monetary easing, and fiscal expansion. The immediate goal is to boost domestic demand and product growth while simultaneously raising inflation to two percent

The intent of the structural policies is an improvement in the country's prospects. The policies increase competition, reform labor markets, and expand trade partnerships. There are some significant challenges such as growth being slow, inflation being less than hoped, and ballooning debt remaining a prime concern. Also, difficult structural reforms have not been as successful as anticipated.

Abenomics

Abenomics is defined as an aggressive set of fiscal and monetary policies as well as structural reforms meant to pull Japan from its long standing deflationary slump. The fiscal stimulus began in 2013 when the government started focusing on building critical infrastructures such as earthquake resistant roads, tunnels, and bridges.

The core of Abenomics is its unorthodox monetary policy. The Bank of Japan has an unprecedented asset purchase program that simultaneously injected liquidity and pushed interest rates into the negative for the first time. Throughout 2016, Japan's economic recovery continued to sputter while the Prime Minister's budget deficit spending was at near-record levels.

The initial round of quantitative easing doubled the bank's assets. At the beginning of 2017, inflation was still below one percent. A second open-ended phase has moved into place that will continue to consist of $660 billion in asset purchases yearly until the two percent target is achieved.

No other country has matched the scale of purchases made by the Bank of Japan. The assets exceed 70 percent of the gross domestic product. The U.S. Federal Reserve's assets are below 25 percent of the GDP. A country's assets are used when calculating the rate of inflation.

In January 2016, the Governor of the Bank of Japan, Haruhiko Kuroda, made an unexpected decision to introduce negative interest rates to spur investment and lending. The BOJ is one of few countries to push rates below zero.

Structural Reform

Structural change that is aimed at reviving Japan's competitiveness includes increasing workforce diversity, cutting corporate taxes, liberalizing the agricultural sector and the labor market, and slashing business regulations.

Many analysts feel Abenomics success depends on structural reform. The broad reform package also includes overhauling health care, environment, and energy sectors. The Abe coalition has been a parliamentary majority for over four years.

After winning the last election, the Prime Minister reached an agreement to limit the power of JA-Zenchu, the national agriculture cooperative. The cooperative oppose the modernization of the moribund farming industry in Japan. It is hoped to accelerate programs that have shown slow progress.

The demographics of Japan signal future problems. Over the next 50 years, Japan's population could see a decrease of more than 30 percent. A platform to raise the birth rate and expand social security is aimed at reversing the demographic decline in Japan.

What Can the U.S. Learn from Japan?

The ongoing verbal disputes between President Trump and Kim Jong-un threaten the economy of many countries. The economic problems in the U.S. center around some of the same challenges faced by Japan. The Trump administration ran an election campaign promising some of the same structural reforms that are in place in Japan. 

Similar issues in the U.S include unemployment, wages, welfare, inflation, corporate taxation, environment, and healthcare. No reform is going to happen overnight or during one term of office for a president. Although President Trump has a new vision of economic policy and global trade, it will take more than four years to implement changes.


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