New Governments & Economic Models in NE Asia
Inseong, Hwang, SERI Quarterly
Asia's leadership transition, which began in Japan with the launch of the Shinzo Abe cabinet in 2012, has been completed in Korea and China as well. Each new government has pledged to resolve pressing internal problems with new economic paradigms. New buzzwords for the regimes include "Abenomics," the "creative economy" and a "call for common prosperity" in Japan, Korea and China respectively. Accordingly, the region's business communities are faced with a new environment of intensified cooperation and competition.
Abenomics, "Creative Economy," "Common Prosperity," technological gap, yen depreciation
NEW ECONOMIC POLICIES UNDER NEW GOVERNMENTS
In the early 1990s, Japan began what is now called a "lost decade" that has since extended to become two "lost decades." After Japan's real estate bubble imploded, it experienced a debilitating cycle of deflation, deferred consumer spending, sinking profits and delayed corporate investing that led to more of the same. Stuck in a deflationary spiral, Japan has suffered a "complex recession" that has resisted all attempts to bring it to an end. Although Japanese growth averaged a robust 4.6 percent in the 10 years preceding the collapse of the bubble economy, the next 20 years saw growth hover at an anemic 0.8 percent.
Abe came to power in December of last year, promising to reinvigorate the economy in his second try as prime minister. The centerpiece of his economic strategy is a massive injection of cash into the economy to drive down the value of the yen and to push up domestic prices.
Abenomics consists of what it calls "three arrows."1 The first arrow involves quantitative easing by the Bank of Japan (BOJ) on a drastic scale. Abe believes that insufficient monetary easing has caused the Japanese economy to sink further into chronic deflation. He expects the BOJ to pour yen into the economy via bond purchases for as long as it takes to push inflation to 2 percent. He also replaced the previous BOJ governor with Haruhiko Kuroda, a vocal proponent of monetary easing, to ensure the task is completed.
The second arrow consists of fiscal spending on infrastructure to kick-start an economic recovery. A 13.1 trillion yen supplementary budget for fiscal year 2012 was enacted in February to finance public investments. In addition, Japan's "Homeland Endurance Enhancement Plan" earmarks 200 trillion yen for public works projects over the next 10 years to guard against earthquakes and other natural disasters.
The third arrow is a reform strategy that aims to spur growth of private-sector companies through bold deregulation and development of strategic markets. In mid-June, the Abe cabinet endorsed growth measures formulated on the basis of discussions by the Headquarters for Japan's Economic Revitalization and its affiliated Industrial Competitiveness Council.
Financial markets reacted first to the monetary easing policy. Reflecting a surge in optimism over the Japanese economy, the Nikkei index hit 15,627 on May 22, hitting a 76 percent rally from September 28, 2012, prior to a series of comments by Abe calling for unlimited monetary easing. The yen/dollar exchange rate climbed to 103.21 on May 17 from 77.6 at the end of last September, representing a nearly 25 percent depreciation of the yen against the dollar. Some Japanese exporters, notably automakers and electronics firms, have been able to improve their operating profits thanks to yen depreciation. Nevertheless, it is still too early to say that the BOJ's monetary easing will lead to restored dynamism and sustained growth of the real economy.
An unexpected rise in government bond yields in the second half of May sent stocks into a multi-week plunge, casting doubts on the lasting effectiveness of Abenomics. However, a policy that could reverse yen depreciation is unlikely. The weakened yen has elevated the price attractiveness of Japanese goods, helping boost exporters' sales, while the continuation of trade deficits causes the yen to weaken further. …