Yesterday I had the privilege (and indeed it was a privilege) to attend the Economist Group's Bellweather 2013 Japan conference.
My key takeaways from the panels:
Don't Call It Structural Reform
Whatever the contents of the Third Arrow of Abenomics, due for release next week, it will not be a package of structural reforms for various problematic sectors of the economy.
Instead, if the vision laid out yesterday by Parliamentary Vice Minister of Economy Trade and Industry Sato Yukari is accurate, the third arrow is an economic growth plan, light to the point of insult on deregulation and liberalization and heavy on the picking and choosing of winners and losers among industries. The centrality of dirigisme in the presentation almost had me singing La Marsellaise in response.
[Come to think of it, "Allons enfants de la Patrie/Le jour de gloire est arrivé!" pretty much encapsulates the Abe Shinzo message to his people and the world this year.]
This made me wonder:
1) do Abe, the members of his Cabinet and his advisers understand that the rise in the equities markets and the willingness of bondholders to sit tight as the Bank of Japan rampages through the bond market require a faith that structural reform is in the offing, meaning that there will be a real payoff for investing in Japan?
2) Senator Sato started out her political career as an assassin for free markets enthusiast Koizumi Jun'ichiro. Prior to that she was an economist with JP Morgan and Credit Suisse First Boston, presumably in favor of deregulation and the end of protectionism.
Now she does P.R. for industrial policy.
"Ending deflation" does not mean what you think it means
Until yesterday, I had thought that the Abe Cabinet's and the Bank of Japan's goal of "leaving behind deflation" meant fiscal and monetary policy and maybe structural reform leading to a 2% rate of CPI inflation by 2014.
I was (some would add in an "of course" here) mistaken.
"Leaving behind deflation" is not inflation. It is Inflation+ ™ .
As explained yesterday by Bank of Japan Governor Nakaso Hiroshi, simply having 2% inflation in 2015 will not suffice. There has to be
2% CPI inflation + increased corporate profits + increased wages and bonuses
before the standard of what constitutes "leaving behind deflation" will be met.
Again the urge to rise from my seat gripped me, this time in order to shout, "But that's cheating. You're moving the goal posts!"
The core argument of the "Whip deflation now" crowd has always been that deflation was a primary cause of economic malaise. Whip deflation and the country could get on its feet again. (Link)
Now the BOJ activist wing, as represented by Nakaso, seems to saying that no, reigniting inflation does not do the magic trick. One needs more. Indeed you need the items – higher incomes and corporate profits -- that the deflation voodoo skeptics kept saying were the real targets worth the shooting for.
The activists, now that they are in control of the levers of the economy, are admitting that they were being disingenuous. Deflation was not in and of itself a cause of economic malaise. At least part of deflation, perhaps even most of it, was a symptom of decay.
Supporters of the new Inflation+ ™ formula might counter, "It was never a simple end deflation/you will have economic growth" situation. Inflation, were it to return, would always had to had "demand-pull" in addition to "cost push." (Link)
Yes, but that is not how the deflation fighting mantra went, at least not until the deflation fighters seized the reins this past winter.
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