Courtesy of Mish.
Michael Pettis, at China Financial Markets, discusses Abenomics, Japan’s shrinking (for now) current account surplus, debt, and interest rates in an interesting email. From Pettis …
Abenomics in Japan is likely to put upward pressure on the national savings rate in Japan (but not necessarily on the household savings rate). This implicitly requires that over the next two or three years Japan run a higher current account surplus. In a world struggling with excess capacity and insufficient demand, pressure to increase the Japanese current account surplus is likely to result in higher unemployment – either abroad, if Japan’s trade partners do not take steps to protect themselves from the counterbalancing deficits, or at home if they do.
It may seem a little quixotic to worry about a surging Japanese current account surplus just now when in fact Japan’s external balance has declined substantially and is surprising analysts on the downside.
As I discuss in the first two chapters of my January book, “The Great Rebalancing“, currency depreciation does not affect the trade balance directly by changing relative prices. It does so indirectly by changing the relationship between savings and investment.
As production rises relative to consumption, the difference between the two – the national savings rate – must also rise. This means that as the yen depreciates, the consequence is likely to be an increase in the Japanese savings rate.
But it doesn’t end there. Japan seems to be taking other steps to force up its domestic savings rate. Here is last Tuesday’s Financial Times:
Shinzo Abe, Japan’s prime minister, pledged to press ahead with the first increase in sales tax for over 15 years despite objections from some of his closest advisers, gambling that measures to address the country’s massive debts would not hinder his attempts to jump-start the economy.
The increase in the consumption tax, part of the proceeds of which will be used to increase infrastructure investment, will accomplish many of the same results as the deprecation of the yen. A consumption tax, like a tariff, is effectively a kind of back-door currency devaluation, with a slightly different mix of losers among the household sector and winners among the producing sector.
By boosting production and reducing consumption, however, it automatically forces up the national savings rate in the same way as does currency depreciation.
So far, this all looks like an attempt by Abe to increase Japanese competitiveness and so increase its total share of global demand, but not by increasing Japanese productivity, which is the high road to growth, but rather by reducing the real Japanese household income share of what is produced. This effectively means Japan will be growing at the expense of its trading partners. As the Japanese become less able to consume all they produce, the excess must be exported abroad.
If the world were in ruddy good health, we might not worry too much about policies aimed at Japan’s pulling itself out of the mess created in the 1980s, but with the whole world struggling with weak demand and with country after country trying to reduce domestic unemployment by selling more abroad – effectively exporting unemployment (with Germany in particular hoping to resolve the European crisis not by increasing its net domestic demand, as it should, but rather by forcing German surpluses outside Europe) – there is a real question in my mind as to how successful the Japanese program of Abenomics is likely to be if it implicitly requires a burgeoning trade surplus.
Expect Higher Unemployment…
