Most people including the Japanese think the absence of any growth in GDP for 20 years is a poor performance. They have just elected a new government pledged to kick start faster growth and inflation through an enormous monetary stiumulus. It follows two decades of monetary and fiscal stiumli on a large scale. Neither of these so far has induced inflation or much growth in GDP.
Running a permament very large budget deficit has not provoked growth. It has resulted in a large state debt, now more than 230% of Japan’s GDP (on official IMF figures which place the UK and Germany around 80% of GDP). Japan has by far the largest state debt as a proportion of GDP of any country, and the second largest after the USA in absolute terms.
Nor has the monetary laxity so far brought on good growth. Japan has been held back by broken banks, by the long after effects of large loan losses, by a reluctance to add to property and shares given the poor price performance, and by an ageing population more prone to save for fear of the poor economic outlook.
So this time the state is adding not only to the state deficit, but more importantly is going to set out to double the money supply. The Bank of Japan has announced it will buy in 50 tillion yen of government debt each year, 1 trillion yen of ETFs and 30 billion yen of Real Estate Investment trusts. The money base will be increased by 60-70 trillion yen a year.
So far the policy has pushed the yen down sharply, allowing more exports and some imported inflation. It has also pushed up Japanese share prices, and kept bond yields and interest rates on the floor where they have been for a long time.
The third arrow of the government’s three arrows aproach to growth will take longer. It will be a series of supply side reforms to improve competition and competitiveness in the Japanese market. Much will probably depend on these reforms, if Japan is to avoid another disaappointing result in terms of output and incomes from yet another blockbuster of amonetary stimulus. A country of savers with no recent history of inflationary wage rises or imprudent spending is not going to be easy to tip into inflationary growth.