Econdiscussion
  • Home
  • Articles
  • About Me

Articles

"Japan's Latest Recession Spells Trouble for Abe" - Financial Times

4/11/2014

0 Comments

 
Synopsis: An update on to what extent and why Abenomics is struggling.

Click here to read the original article
Discussion:
This article discusses the problem Abenomics is facing, and focuses on the problems with Japan’s falling GDP, rising debt and stagnant inflation.

The general plan of Abenomics was as follows:

1. Aggressive QE (bond-buying programs) should increase inflation expectations

2. The rise in inflation expectations would lead to an increase in wage inflation and nominal GDP growth, which means confidence would be instilled in the market. A tightening of fiscal policy (i.e. increased sales tax) should therefore not break the confidence.

Clearly, the second step has not been achieved, as seen by the low nominal GDP growth.

The question now is whether fiscal policy should be tightened. The IMF believes it should be, stating that they fear for Japan’s increasing debt, but Paul Krugman, Lawrence Summers and the author of this article, Gavyn Davies, disagree. They warn Abe that tightening fiscal policy prematurely, when the economy is recovering, might push the economy back into a recession. Davies adds that delaying the sales tax increase will not exacerbate the debt/GDP ratio like the IMF fears; it will only increase it by 0.75 percentage points from the already existing 245%.

From this, we can see that Abe is facing a dilemma; on one hand, he can increase austerity measures (contractionary fiscal policy) and alleviate the government debt. Resultantly, consumer confidence will break, which, according to Krugman, will push the economy into a recession. On the other hand, Abe can focus on QE (expansionary monetary policy), thereby increasing government debt but solidifying consumer confidence. The IMF feels as though increasing government debt is an issue that must be tackled in the short term. Davies disagrees.

Key words:
1. Inventory shredding: This phrase is seen in the second paragraph of the article. It means to bring down the inventory. For example, if Mrs. X runs a cupcake shop and she has made 100 cupcakes, of which 5 were bought, she might stop producing cupcakes to sell off the remaining 95 of them. Selling off her excess inventory of 95 cupcakes is called inventory shredding.

Context:
What does Davies mean when he says that “nominal bond yields had to be held down as inflation expectations increased” (paragraph 7)? The purpose of holding down nominal bond yields is to decrease the value of real bond yields.

Just like with interest rates, where nominal interest rates = real interest rates + inflation:

Nominal bond yields = real bond yields + inflation

So, if nominal bond yields stayed the same, and they expected inflation to increase, then the value of real bond yields would decrease.
0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    Categories

    All
    Abenomics
    Adam Smith
    Adverse Selection
    Ageing
    Amazon
    Arrows
    Arthur Okun
    Asset
    Asymmetric Information
    Ben Bernanke
    Booms And Busts
    Braess' Paradox
    Brazil
    Bretton Woods
    Brexit
    Bubble
    Bull Market
    Business Cycle
    Capital Control
    Capital Flows
    Capital In The Twenty First Century
    Capital In The Twenty-First Century
    Carry Trade
    Causation
    Central Bank
    China
    Christopher Sims
    Classical Economics
    Consumption
    Counter-cyclical
    CPI
    Creative Destruction
    Crisis
    Daron Acemoglu
    David Cameron
    David Ricardo
    Debt
    Debt-to-GDP
    Deflation
    Deleverage Cycle
    Demography
    Devaluation
    Developing Economies
    Development
    Diffusion
    Diminishing Returns
    Dominant Strategy
    Dominated Strategy
    ECB
    Economic History
    Economic Theory
    Equality
    Equitity
    Equity
    Equity Investments
    EU
    Exchange Rate
    FDI
    Fed
    Federal Reserve
    Finance
    Financial Crisis
    Financial Instability Hypothesis
    Financial-instability Hypothesis
    Financial Times
    Fiscal Multiplier
    Fiscal Policy
    Fixed Exchange Rate
    Fleming
    Floating Exchange Rate
    Free Market
    Free Trade
    Freshwater
    Game Theory
    GDP
    George Akerlof
    Germany
    GFC
    Gini Coefficient
    Global Financial Crisis
    Globalization
    Government Intervention
    Government Spending
    Great Depression
    Growth
    Heckscher-Ohlin
    Helene Rey
    Hyman Minsky
    ICOR
    Illiquid
    Immigration
    Income
    Inequality
    Inflation
    Infrastructure
    Innovation
    Interest Rates
    Investment
    Italy
    James Robinson
    Janet Yellen
    Japan
    Jean Tirole
    J.M. Keynes
    John Nash
    Keynesian Economics
    Labor
    Lawrence Summers
    Leverage
    Lindau
    Liquid
    Malaysia
    Managed Exchange Rate
    Mario Draghi
    Matteo Renzi
    Michael Spense
    Minsky Moment
    Mixed Strategy
    Monetary Policy
    Monopoly
    Monopsony
    Moral Hazard
    Mundell
    Mundell-Fleming Trilemma
    Nash
    Nash Equilibrium
    Nigeria
    Nobel
    Nobel Laureates
    Nobel Prize
    Paul Krugman
    Paul Samuelson
    Perfect Information
    Phillips Curve
    Politics
    Poverty Traps
    Principal Agent Problem
    Prisoner's Dilemma
    Productivity
    Protectionism
    QE
    Qualitative Easing
    Quantitative Easing
    Redistribution
    Regulation
    Retrenching
    Rich
    Risk
    Robert Shiller
    Saltwater
    Saving
    Secular Stagnation
    Shiller
    Shinzo Abe
    Signaling
    Stakeholders
    Stolper-Samuelson Theorem
    Strategy
    Subsidies
    Tariff
    Taxation
    Taxes
    The Economist
    The Market For Lemons
    Theory Of Comparative Advantage
    Thomas Piketty
    Total Factor Productivity
    Trade
    Trilemma
    UK
    Unemployment
    U.S.
    USD
    Wage Benefits
    Wages
    Wealth
    Wealth Effect
    Wolfgang Stolper
    WTO
    Yuan

    Author

    JANANI DHILEEPAN
    A gap year student trying to explore real-world economics

    Archives

    May 2018
    February 2018
    January 2018
    December 2017
    November 2017
    April 2017
    February 2017
    December 2016
    October 2016
    September 2016
    August 2016
    July 2016
    May 2016
    March 2016
    January 2016
    November 2015
    September 2015
    August 2015
    July 2015
    June 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014

    RSS Feed

Powered by Create your own unique website with customizable templates.