Abenomics: How to Overcome Japan’s Long Depression and the Global Financial Crisis
In this lecture I evaluate the three arrows of Abenomics in the light of policy recommendations in an open letter to President Franklin Roosevelt from Mr. Keynes in December 1933: the combination of “cheap money” with “wise spending”, in addition to exchange rate arrangements between the US and the UK aimed at achieving stable prices.
For the first arrow, I assess the effectiveness of the “Quantitative and Qualitative Easing Policy” announced by the Bank of Japan in April 2013 to attain a 2% inflation target within two years, with regard to the effects on asset prices and inflation expectations. It will take longer than two years for the Bank of Japan to achieve the 2% inflation target. At the same time, I put emphasis on the need to avoid risks in the process of exit, in addition to the need to take coordinated action with the debt management policy.
On Japan’s persistent deflation and stagnation, I identify the two causes: excessive yen appreciation and a fall of the natural interest rate after the 1980s bubble burst. The former points to the importance of international financial reforms to avoid the misalignment of exchange rates among major reserve currencies, and to secure the supply of safe assets (“Bretton Woods III”), while the latter indicates the need to implement broadly-based reforms covering political, social and economic institutions in Japan. I point out a missing link of the current “growth strategy” (the third arrow) of the goal of 2% medium-term growth, by examining three scenarios of the future prospects of Japan in 2050.
Key wordsInflation Targeting Supply of Safe Assets Institutional Change
JEL Classification CodeE58 E11 E31
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