Tag Archives: Japan

Europe at risk of a Japanese style lost decade

Since the start of the global financial crisis in 2008 and with the exception of Germany, none of Europe’s biggest economies have returned to the level of economic output they had in the pre GFC days. In Japan in the 1990’s there was the need for the central bank to aggressively fight deflation, and let banks take credit losses quickly, suggesting that expansionary fiscal policy did not offer a way out of low economic growth.

According to the New York Times – economic growth not realised represents investments in education that were never made, research was never financed, businesses that failed and careers that ended too early or never got off the ground.

Economists warn that the euro zone is on the same path as Japan was in the 1990’s, when failure to deal with weak banks led to a decade of stagnation. The Japanese never fixed their banks and as banks in Europe have limited cash reserves they are reluctant to take the risk of lending money. Although the ECB has supplied banks with significant amounts of cash they cannot force them to lend the money out to investors which ultimately creates growth and jobs. Below are some statistics which allude to this.

Demand for housing loans in Q1 2012

Portugal 70%↓
Italy 44%↓
Holland 42%↓
Italy – business loans 38%↓

Recessions can be beneficial as they can improve efficiency and reduce risky lending. However for the eurozone this is no normal recession in that its duration will be significantly longer than the norm. See the interview below with investor George Soros.

Deflation for New Zealand Economy?

The recent CPI figures published by the Dept of Statistics in Wellington show that there was a 1% in the CPI from the June 2011 quarter to the June 2012 – the lowest annual rise since 1999. This is at the bottom of the Policy Target Agreement which stipulates that the CPI should be kept between 1-3%. The question now is whether annual headline CPI inflation can avoid dipping below the bottom of the 1.0% and whether the threat of deflation is a serious concern?

Deflation – why is it a concern?

In the short-term a period of deflation can help the economy. Falling prices mean that consumers can buy more with their income and rising purchasing power would provide a boost to confidence and could assist the economy by increased growth.

However a longer period of deflation can be very damaging to an economy for two reasons:

1. Expecting prices to be lower in the future consumers put off purchasing goods and services in the expectation that they will get lower. This leads to a contraction of demand and ultimately lower growth. Japan in the 1990’s is a good example of this – see graph below.

2. A more dangerous scenario is debt deflation. As prices fall the real value (nominal – CPI) of debt increases – just as it decreases if prices are rising.

The increase in debt that people have taken on over the last 5 years makes this latter point very worrying. However, commentators have suggested that deflation shouldn’t become a problem in NZ.

Professor Bernanke v Chairman Bernanke

In a recent edition of The New York Times magazine Paul Krugman wrote an article discussing the role of Ben Bernanke as an academic versus that of being the Fed Chairman.

When the financial crisis happened in 2008 it seemed that there could be no better person to be Fed Chairman. Having studied the Great Depression and written various academic papers on this and the crisis in Japan in 1990’s economists felt that Bernanke was the man for the job. Although the Fed has done a lot to rescue the financial system there is still major concerns about the labour market and the rising long-term rate of unemployment. Remember that the Fed has a dual mandate of Price Stability and Maximum Employment. In order to stimulate growth in the economy, especially when inflation is low, central banks lower interest rates but when the Fed Funds Rate reached 0 – 0.25% on the 16th December 2008 they basically ran out of ammunition as rates couldn’t go any lower. Here you tend to get stuck in what we call a “liquidity trap” in that monetary policy is no longer effective. When Japan was going through very slow growth in the 1990‘s, in which it experienced deflation, Professor Bernanke stated that Japanese policy makers should be a lot more active in trying to stimulate growth and inflation. With interest rates already at 0% he suggested that monetary authorities were not proactive enough to experiment with other policies even though they might have been radical. This all harks back to the days of FDR (Franklin D Roosevelt) in which he created work schemes, infrastructure projects etc, in order to boost employment. I have summarised Paul Krugman’s article below in a table format which shows Bernanke policies for the US economy as a Professor v Chairman.

So why hasn’t he taken on the role of the Academic Bernanke? Krugman suggests that:

this is the effect of bullies and the Fed Borg*, a combination of political intimidation and the desire to make life easy for the Fed as an institution. Whatever the mix of these motives the result is clear: faced with an economy still in desperate need of help, the Fed is unwilling to provide that help. And that, unfortunately, make the Fed part of the broader problem.

*Krugman is a keen “Star Trek” fan and compares the Federal Reserve to a Borg — a race of beings that act based on the wishes of a hive mind, and present major threats to the Starfleet and the Federation.

Central Banks give cheap loans to help global markets

Central Banks worldwide have agreed to provide cheap loans in US$’s to banks in Europe and other parts of the global economy. There is obviously serious concerns about the economic climate in Europe but will it calm the markets? The truth of the matter is that more liquidity alone is not going to solve the economic problmes of the eurozone countries. The graphic below does show some positive signs with bond yields on the way down which suggests that there is less risk associated with their purchase. However there is still a long way to go for stability to return. See graphic below from the WSJ.

Central banks have offered cheaper credit before:
March 2011 – interevened to reduce the value of the Yen following the earthquake and tsunami.
October 2008 – central banks cut rates to reduce the shock on financial markets when Lehman Brothers went under.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.” combined statement form the 6 central banks. These include:
-US Federal Reserve,
-Bank of Canada, the Bank of England,
-Bank of Japan,
-European Central Bank and
-Swiss National Bank.

Higher natural rate of unemployment will mean structural reforms

The recent special report in The Economist looked at the altering structure of the labour market worldwide. Obviously globalisation and technology have brought big changes in the nature of work, and levels of unemployment will remain high in the developed world as developing countries see their numbers employed being boosted.

Edmund Phelps, Nobel Economist, thinks that the US natural rate of unemployment in the medium term is realistically around 7.5% which is significantly higher than a few years ago. Remember the natural rate occurs when inflation is correctly anticipated – this level of unemployment results when the economy is at full employment.

Michael Spence, another Nobel prize-winning economist, agrees that technology is hitting jobs in America and other rich countries, but argues that globalisation is the more potent factor. Some 98% of the 27m net new jobs created in America between 1990 and 2008 were in the non-tradable sector of the economy, which remains relatively untouched by globalisation, and especially in government and health care. Lowering this natural rate will require the following:

1. changing education to ensure that people enter work equipped with the sort of skills required so that there is no mismatch
2. adjusting the tax system – incentivise work
3. modernising the welfare safety net – encourage those to find work
4. encourage entrepreneurship and innovation.

This is easier said than done.

Long-Term Unemployment
This has increased dramatically in many countries – 58% in Ireland, 40% in both Spain and Japan, and 30% in the US, see graph below.

The concern with these figures is that the longer poeple are out of work the less likely there are able to find future employment. There are two reasons for this:

1. Their skills get out-dated very quickly and this is especially prevalent in the current labour market as technology is starting to takeover many procedural white-collar jobs.
2. Motivationally they find it hard to engage in the process of lookign for work and this is esepecially prevalent once a person is on a generous welfare benefit.

According to The Economist:
Long-term unemployment often turns into permanent unemployment, so governments should aim to keep people in work, even if that sometimes means continuing to pay them benefits as they work.

NZ economy strong despite Christchurch earthquake

The 2011 March quarter GDP figures were quite amazing when you think of the tragic earthquake in the Christchurch area last February. The economy grew 0.8% (0.4% forecast) which signifies that the economy outside of Christchurch is very strong. If you compare the data from the other recent natural disasters, being the Queensland floods and the Tohoku earthquake/tsunami, New Zealand has actually grown – see figures and graph below:

* Australia had a 1.2% drop
* Japan had a 0.9% drop


The NZ$ and QE3

Also the NZ$ keeps motoring ahead – yesterday reaching US$0.85. However, with the official cash rate at 2.5% one wonders what is the currency reacting to? Most likely it was:

*the better than expected Q1 GDP figures outlined above and
*the words of US Fed Chairman Ben Bernanke who strongly suggested the US economy was in need of some more serious antibiotics in the guise of QE3 – Quantitative Easing 3 in which the Fed bascially print money.

Bernanke indicated that QE3 would depend on two conditions, economic weakness beyond current expectations, and a renewed threat of deflation.

The Fed is charged by Congress with minimizing unemployment, and some of its critics say that current unemployment rate of 9.2 percent should be a sufficient reason by itself for the central bank to expand its roster of economic aid programs.

Mr. Bernanke noted that the scale of the Fed’s existing efforts was unprecedented. The central bank has kept short-term interest rates near zero for more than two years. It also owns more than $2 trillion in mortgage-backed securities and government debt, the legacy of its two asset-purchase programs to reduce long-term interest rates.
New York Times

Future worry for NZ economy
These figures indicate strong underlying growth in the NZ economy but there are concerns about capacity contraints if the economy is to grow more. And if this is the case there will be significant pressure on prices and a sooner than predicted OCR increase by the RBNZ.

I am off on holiday for a week and will resume service on Monday 25th July.

BBC graphics show rise of Asia

Thanks again to Richard Well for this link to the BBC site. The BBC’s Power of Asia season examines how economies in the region have changed over the past 30 years. Use the chart builder below to compare countries in terms of wealth, health, life expectancy, education and energy consumption. It is very similar to the Gapminder site but the BBC version does give some useful information below the graphs. Click here to go to the BBC site.

Tohoku versus Kobe earthquake

Many thanks to Yr 12 AS student Tomo Greer for this piece on the comparison between the recent Tohoku earthquake and that of Kobe in 1995.

Kobe in 1995 (and affected regions)
* Was responsible for 12.4% of Japan’s GDP (gross domestic product).
* Caused $120 billion in damages
* Declined to 24.4% by the end of June
* The Nikkei 225 regained its pre-quake level by mid-December 1995.
* Kobe was one of the biggest ports in Asia and a very industrial part of Japan

Tohoku in 2011
* Area not as industrialised as Kobe so only affected 7.8% of Japan’s GDP.
* Bank of Japan immediately injected $85-billion into the markets to show support
* The effect was more emotional rather than effecting the economy; the earthquake was on a bigger scale but effecting less of the industrial parts of Japan
* But many companies supply lines affected e.g. Toyota and Honda

The Kobe earthquake had little long term impact on the economy compared to the recent Tohoku earthquake, was on a bigger scale resulting in many more deaths. Long term affect still uncertain. However, as the damage is bigger in the Tohoku earthquake (because of the tsunami) even though it has not affected Japans industrial heart, it will take longer for the economy to recover. Overall it is hard to predict the long term affects as we are not able to say how the economy is going to be for the next year; considering Japan is still dealing with the nuclear radiation issue.

Nikkei stocks – affect of Tohoku and Kobe quakes

Interesting Phillips Curve


I saw this on the Tutor2u blog. Remember the Phillips Curve (named after New Zealander Bill Phillips) relates the level of unemployment to the rate of change of money wage rates (which are a proxy for inflation). If you look at Japan’s Phillips Curve from January 1980 to August 2005 we get the graph to the right. You can see the trade-off between unemployment and inflation – ie high inflation low unemployment and vice-versa.

However, Gregor Smith of Queen’s University Canada, found out that if you rotate the Phillips Curve around the vertical axis so that minus unemployment is now on the horizontal axis you see a map of Japan. Who said economics is a dull science.

Will Japan’s Crises Disrupt Global Economic Recovery?

Here is an interview with The Economist writer Greg Ip which was screened yesterday on the PBS Newshour.
Key points are:
* Japan is the key supplier for a lot of manufacturers – it is the world’s largest suppliers of flash memory and of semiconductors over the last few years
* Japan has virtually no natural energy resources of their own – very dependent on nuclear power
* Loss of nuclear power will increase demand for fossil fuels – with this and the unrest in the Middle East global oil prices will rise
* Japanese seem to have the funds to rebuild the economy as they are very high savers. They have bought all their government’s debt to date