Goldman Sachs is out with a new report titled ‘Will the first two Abenomics arrows hit the mark? Pointers from Takahashi policy’. Analysts at the firm note the differences and similarities between the policies of PM Shinzo Abe (commonly referred to as Abenomics) and those which Japan pursued in the early and mid 1930s. The report discusses Abenomics policy regarding the Yen (obviously), capex, demographics and other key issues. The conclusion is not very promising as some such as Lonnie Thompson of The Rationalist Pessimist has pointed out.
Goldman Sachs on Abenomics: Pointers from Takahashi policy
In this report we analyze the similarities and differences between Abenomics and its model, the Takahashi policy (1932-1936) that lifted Japan out of the Showa Depression, from the standpoint of (1) scope for policy deployment, (2) transmission channels for economic policy, and (3) structural growth factors. Our key findings are as follows.
(1) The forex channel looks as promising for Abenomics as it was for the Takahashi policy. Under Takahashi, the yen stabilized at approximately 40% depreciation against the dollar. Such depreciation today would take the yen to ¥112/US$, which we see as feasible on a horizon of two to three years. Export dependence (ratio to GDP), which is a key initial condition in measuring policy impact, is almost the same level as it was when Takahashi took office.
(2) The more conventional monetary easing channel was very effective under the Takahashi policy but we expect little impact under Abenomics. The policy rate was lowered 3pp under Takahashi but it is only 0.1% today, which effectively leaves no room for additional cuts. In addition, BOJ’s expansion of base money had a significant influence on nominal GNP and consumer prices under the Takahashi policy whereas today this channel has been extinguished. This is primarily due to structural factors rooted in demographics, which have reduced the corporate appetite for capex in Japan.
(3) The potential growth rate, which is a key determinant of capex, is strongly influenced by demographics. The productive population was growing around the time of the Takahashi policy whereas today it is shrinking. At the same time, the marriage rate, which has a strong bearing on housing investment and durables consumption, is trending down. Barring improvement in such structural issues, the capex appetite will remain subdued and, as a result, base money expansion ill have only a marginal effect, if any.
(4) Abe has much less scope to deploy fiscal policy than Takahashi had based on the prevailing fiscal deficit and government debt ratio. Government debt was only about 50% of GNP when Takahashi took office versus about 240% of GDP now.
(5) Corporate and banking health had improved before Abe took office and is unlikely to impede economic recovery. This improvement is a point Abe has in common with Takahashi.
Further reading Richard Koo: Japan’s Tactic Of Lying ‘Has Succeeded Brilliantly’