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Reloading Abenomics: Priorities f th N d d R i Shiftfor the Needed Regime Shift
K A L P A N A K O C H H A R
D E P U T Y D I R E C T O R , A S I A A N D P A C I F I C D E P A R T M E N T
I N T E R N A T I O N A L M O N E T A R Y F U N DI N T E R N A T I O N A L M O N E T A R Y F U N D
S E P T E M B E R 4 , 2 0 1 5
Still bumpy recovery on weak domestic demandSt bu py eco e y o ea do est c de a d
1082014 f 5 t 8 t 1997 f 3 t 5 t
Private consumption before and after the tax increase(Monthly index; October = 100)
3
Contributions to QoQ Growth (SA)(In percent)
104
1062014: from 5 to 8 percent 1997: from 3 to 5 percent
Consumption tax rate increase1
2
100
102-1
0
Private inventories
96
98
4
-3
-2 Private consumptionNet exportsGovernment spendingPrivate gross fixed investment
94
t-6
t-5
t-4
t-3
t-2
t-1 t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
t+10
t+11
t+12
t+13
t+14
S C bi t Offi d H A l ti
Before After-5
-4
2013Q2 2013Q4 2014Q2 2014Q4 2015Q2
Private gross fixed investmentReal growth (q/q)
Source: Cabinet Office; and Haver Analytics. Source: Haver Analytics
Inflation remains well below 2-percent targetat o e a s e be o pe ce t ta get
2
Inflation(Year-on-year percent change)
2
Long Term Inflation Expectations(In annual percentage points)
1
1.5
1
1.5
0.5
1
0.5
1
-0.5
0
Headline Inflation adjusted for consumption tax increase
Sub-basket less sensitive to exchange rate (excl. C tax effect) -0.5
0Inflation-Swaps 10Y
Inflation-Swaps (8-10Y)
-1Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015
Sources: CEIC; Bloomberg; and IMF staff estimates
-1Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15
Break-even rate 10Y JGBs
Sources: CEIC; Bloomberg; and IMF staff estimates. Sources: Bloomberg; and Quick Survey.
Portfolio rebalancing is progressing; credit growth showing modest pick upgrowth showing modest pick up
44Corporate
Currency, Deposits & Government Bonds Holdings (2015Q1)(In percent of total portfolio)
3.5Corporations Households Total
Japan: YoY Growth in Bank Lending (In percent)
0
2
0
2
hare
Corporate Pensions
Banks
Other Financial Intermediaries
Insurance
2.5
3.0Corporations Households Total
-4
-2
-4
-2
Ch
an
ge in
Sh
1.5
2.0
-8
-6
-8
-6
2012-15
C
Public Pensions
HouseholdsRebalancing
0.5
1.0
-10-100 10 20 30 40 50 60
Historical fluctuation (2 Std Dev)
Share of Currency, Deposits, and Government Securities
Public Pensions
0.0Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15
S H A l iSources: Bank of Japan Flow of Funds, Haver, and IMF Staff Estimates Source: Haver Analytics.
Labor markets are tight but will wages rise to support consumption? support consumption?
3 5
4.0
Total Compensation and Inflation(In percent, yoy)
N i l ( )
1.34 4
Labor Market
2.5
3.0
3.5 Nominal wage (yoy)
Employment (yoy)
Total compensation (yoy)
I fl ti
1.2
4.0
4.2
4.4
1.0
1.5
2.0 Inflation
1.0
1.1
3.6
3.8
4.0
-0.5
0.0
0.5
0.93.2
3.4 Unemployment Rate (%)
Job opening to application ratio (RHS)-1.0
2013Q2 2013Q4 2014Q2 2014Q4 2015Q2Sources: Ministry of Intenal Affairs and Communications, Ministry of Health, Labour & Welfare; and IMF staff calculations
0.83.0Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15
Job opening to application ratio (RHS)
So rce: Ha er Anal tics Welfare; and IMF staff calculations.Source: Haver Analytics.
Structural impediments stronger than expected including from population agingincluding from population aging
Excessive duality in the labor market is suppressing wage growthsuppressing wage growth
3Changes in part-time wages
Nonregular Workers and Wage Growth (year-on-year percent change) (% of staff)
1.6
Real wage and productivity growth (In percent, 1992-2014)
35
37
1
2
Changes in part time wages
Composition effect
Change in full-time wages
Share of nonregular workers (right side) 1/ 1.0
1.2
1.4
wth
31
33
1
0
g ( g )
0 4
0.6
0.8
wag
e
gro
w
29-2
-1
0.0
0.2
0.4
Real w
27-32001Q2 2003Q2 2005Q2 2007Q2 2009Q2 2011Q2 2013Q2 2015Q2
Sources: Haver Analytics; and IMF staff estimates.1/ Y l A
-0.20.0 0.5 1.0 1.5 2.0
Labor productivity growth
Sources: OECD and IMF staff calculations1/ Yearly Average. Sources: OECD, and IMF staff calculations.
Exports remained subdued despite the large yen depreciationdepreciation
Japanese firms’ offshoring seems to be the main driver behind the sluggish recovery of exportsdriver behind the sluggish recovery of exports
0.301200
Investment by manufacturing sector 1/
Overseas fixed investment (ex Lands in billion yen) 5.0
Real exports(In logs)
0.20
0.25
800
1000Overseas fixed investment (ex. Lands, in billion yen)
Share of overseas investment (RHS)
4 7
4.8
4.9
0 10
0.15
400
600
4 4
4.5
4.6
4.7
0.05
0.10
200
400
4 1
4.2
4.3
4.4
Actual
With offshoring (multiplicative)0.000
97Q1 99Q1 01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1Source: Haver Analytics.1/ Investment flow
4.0
4.1
96Q4 99Q4 02Q4 05Q4 08Q4 11Q4
With offshoring (multiplicative)
Sources: Haver analytics; IMF staff projections
14Q3
1/ Investment flow. Sources: Haver analytics; IMF staff projections.
More drivers are needed to successfully exit from low growth and deflationlow growth and deflation
Some progress in structural reform, but more needs to be doneneeds to be done
4.5%
5.0%Austria Finland GermanyJapan Norway Portugal
Job Vacancies per Labor Force Population 1/
1.468
Female Labor Force Participation Rate and Job Vacancy Ratio (In percent)
3.0%
3.5%
4.0%Japan Norway Portugal
United Kingdom United States
1.0
1.2
64
66FLFP (15 to 64 years old)
Job Vacancy Ratio (RHS)
Abenomics
1.5%
2.0%
2.5%
0.6
0.862
64
0.0%
0.5%
1.0%
0 2
0.4
0.6
58
60
0.0%20002001200220032004200520062007200820092010201120122013
Sources: OECD and IMF staff calculations. 1/ Australia data contains anomalies during the Global Financial Crisis period.
0.0
0.2
561994M7 1997M7 2000M7 2003M7 2006M7 2009M7 2012M7 2015M7
l iSource: Haver Analytics.
Labor shortages are particularly acute in certain sectors including various services sectorssectors, including various services sectors
Increasing foreign labor supply could be part of the strategy to ease shortagesthe strategy to ease shortages
Some improvement in corporate governance structure but its economic impact limited so farstructure but its economic impact limited so far
90(percent)
Appointment of Outside Directors by Tokyo Stock Exchange Listed Companies 45%
Cash and Cash Equivalents per Market Cap
61 4
84.7
70
80
90Companies appointed outside independent directors
Companies appointed more than two independent outside directors
40%
38.8
46.9
61.4
46.5
40
50
60
independent outside directors
35%
31.534.6
38.8
12 9 15.0 16.7 18.021.5
20
30
40
30%12.9
0
10
2010 2011 2012 2013 2014 201525%
Dec 10 Dec 11 Dec 12 Dec 13 Dec 14
Jun -15
Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Sustained growth accelerations are rare, but not unprecedentedunprecedented…
and could also be realized in Japan…and could also be realized in Japan
Female labor participation (See OECD 2015
Potential Impact of Path-Breaking Structural Reforms (Potential growth; Illustrative)
Female labor participation (See OECD, 2015 forthcoming)
Corporate governance reform (See IMF WPs by Aoyagi and Ganelli, 2014; Galen, 2014)
1.5
Financial sector reforms that raise risk capital as well as SMEs restructuring (Peterson Institute, 2012)
TPP (Peterson Institute, 2012)
Product market reform (SEZs, Agricultural, Electricity)
Gains from ending deflation
Reducing labor duality (See Aoyagi and Ganelli, IMF WP, 2013)
Foreign labor (See IMF 2013 Art IV)0.4
Potential Impact (cummulative)
Further balanced consolidation is needed to secure fiscal sustainabilitysecure fiscal sustainability
0.1
Consumption Tax Hike: Deviation in Growth from Baseline (In percentage point)
-0.2
-0.1
0
-0.5
-0.4
-0.3
0 8
-0.7
-0.6(i) 5-stage: 0.5 percent of GDP increase each in year 1-5 (announced in year 1)
(ii) 2-stage (pre-announced): 1 percent of GDP increase in year 1 and 1.5 percent of GDP in 4 (b th d i 1)
-0.9
-0.8
year 1 2 3 4 5 6 7 8
year 4 (both announced in year 1)(iii) 2-stage (ad hoc): same as in (ii) except that the second tax increase is announced in year 4
Source: IMF staff estimatesSource: IMF staff estimates.
The BoJ needs to stand ready to ease further and enhance communication to guide marketsenhance communication to guide markets
80Oct. 2011
Share of JGB holdings by the Bank of Japan(Percent)
500
Potential Portfolio Rebalancing under QQE2, 2014-17(trillion yen)
50
60
70 Oct. 2012
Oct. 2014
Dec. 2019-QQE
Dec 2019-QQE2
61.1%
350
400
450
500
30
40
50 Dec. 2019-QQE2
45.6%QQE-2
QQE 200
250
300
350
10
2022.3%
12.1%9.0% 50
100
150
0
600 650 700 750 800 850 900 950 1000 1050
Outstanding JGBs
Source: IMF staff calculationsUses deficit projections to forecast outstanding amount of JGBs (size of the bubble)
0Bank of Japan Public pension
fundsInsurance companies
Private banks (major and regional)
Japan Post bank
Sources: IMF staff projectionsUses deficit projections to forecast outstanding amount of JGBs (size of the bubble). g )Sources: IMF staff projections.
So, can Abenomics succeed? So, ca be o cs succeed
My best answer is “I hope so”. y p
Many difficult decisions are needed and that Many difficult decisions are needed and that requires courage not to engage in “politics as
l”usual”