JAPAN: by Peter WestmoreNews Weekly
Japan's policy U-turn to reverse 20-year decline
, February 16, 2013
The recently-elected government of Shinzo Abe in Japan has announced a radical — some call it revolutionary — expansion of government economic activity, to address over 20 years of economic stagnation.
The Liberal Democratic Party was elected last year with a mandate to get Japan’s economy moving again, in the wake of the global financial crisis and the Fukushima disaster. The latter two events, on top of the country’s long-term economic decline, has made Japan almost irrelevant to the world’s economy, despite its importance as a source of high-technology manufactured goods.
One of the new government’s first initiatives was to reverse its predecessor’s policy to shut down all Japan’s nuclear power plants.
After the Fukushima tsunami and reactor meltdown in 2011, the former government, led by the left-leaning Democratic Party of Japan, announced that it would phase out nuclear power, which supplied 30 per cent of Japan’s domestic electricity, by the 2030s.
All 50 nuclear reactors were taken offline after the meltdown at the Fukushima No. 1 plant, which was struck by the east Japan earthquake and tsunami on March 11, 2011. This drastically increased Japan’s reliance on imported oil and gas, and pushed up prices for both business and consumers. Only two reactors have since been restarted.
The cost of imported oil and gas to replace the closed nuclear-power plants was estimated at $40 billion a year by the World Nuclear Association.
The new government has continued the former government’s policy of requiring nuclear plants to meet substantially higher safety and earthquake standards before they will be allowed to re-open. But Mr Abe is adamant that existing nuclear power plants will be re-opened, and new reactors would also be commissioned.
Another measure which the Abe government has foreshadowed includes forcing the Bank of Japan to increase lending to both business and consumers, by lowering interest rates.
The government is also committed to reducing the exchange rate for the Japanese currency, the yen (¥), which appreciated by 25 per cent against the US dollar over the previous three years.
The government intends to do this by cutting domestic interest rates and by instructing the Bank of Japan to purchase large quantities of foreign bonds.
A further major development is that the Japanese government will spend about $10 billion in direct investment in high-technology industries, including troubled electronics and carbon-fibre manufacturers.
These initiatives have aroused the ire of free-market magazines such as The Economist, as well as the German government.
The Economist sniffed that Mr Abe was “shooting blanks” — and that his policies would not work. The German finance minister, Wolfgang Schäeuble, told the Bundestag in Berlin that the central economic challenge was high levels of government indebtedness, saying that the problem was not limited to the crisis-hit eurozone, and that the situation in Britain and the United States was worse.
He then said, “And I will add: I am quite concerned by the new policies of the newly elected government in Japan.”
A very different interpretation of the recent shift in Japan was given by the London Daily Telegraph’s international business editor, Ambrose Evans-Pritchard. He wrote recently, “Premier Shinzo Abe has vowed an all-out assault on deflation, going for broke on multiple fronts with fiscal, monetary and exchange stimulus.
“This is a near copy of the remarkable experiment in the early 1930s under Korekiyo Takahasi, described by [US Federal Reserve chairman] Ben Bernanke as the man who ‘brilliantly rescued’ his country from the Great Depression.
“Takahasi was the first of his era to tear up the rule book completely. He took Japan off gold in December 1931. He ran ‘Keynesian’ budget deficits deliberately, launching a New Deal blitz before Franklin Roosevelt took office.
“He compelled the Bank of Japan to monetise debt until the economy was back on its feet. The bonds were later sold to banks to drain liquidity.
“He devalued the yen by 60pc against the dollar, and 40pc on a trade-weighted basis. Japan’s textile, machinery and chemical exports swept Asia....
“Takahasi was assassinated by army officers in 1936 when he tried to tighten by cutting military costs....
“Few dispute that Japan escaped from slump and pioneered the world’s most successful policy mix — in strictly economic terms — from 1932 to 1936. The trick was to act with overpowering force and combine all forms of stimulus, each leavening the other.” (UK Telegraph, January 20, 2013).
The Japanese government has embarked on a high-risk bid to re-energise the the country’s depressed economy which is beset by many problems, not least of which is an opaque banking system where losses have been hidden for decades, a declining and ageing population, and fierce economic competition from its vibrant neighbours — South Korea, Taiwan (both former Japanese colonies), and China.
Both prime minister Abe and finance minister Taro Aso brushed aside warnings that government intervention would anger trade partners and damage Japan’s strategic alliance with the US. “Foreign countries have no right to lecture us,” said Mr Aso.