China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

“Abenomics: The Delusion of a Backward-Looking Mind”

December 4, 2013

Japan has a problem. The problem is called “Abenomics”. “Abenomics” is actually not “Abenomics”. It is “Ahonomics”. “Aho” is a Japanese word meaning “silly”, “stupid”, “idiotic” and so forth. You get the general idea. I have been trying to make the word “Ahonomics” catch on ever since I thought of it. Indeed I have succeeded to some extent since the word made it onto the short list for “The Word of the Year” award which is given out by a well-known publisher in Japan at each year-end.

“Abenomics” is “Ahonomics” for a variety of reasons. Let me focus on just one for this piece. It is targeted at the wrong problem. And it is applying wrong and dangerous tactics to solve this wrong problem.

The Abe government thinks that what the Japanese economy lacks is growth. This is wrong. For one thing the Japanese economy has actually been growing albeit very modestly for much of the past decade. Moreover, it is already a very large economy. It is also a mature economy with more than enough socio-economic infrastructure to keep it functioning smoothly. It is also a very rich economy. It really does not need to keep on growing faster to make ends meet.

Yet for all these accomplishments it is not a perfect economy. Far from it. It has one very pointed issue that needs to be addressed. This is the issue of what I would like to call poverty in affluence. Japan is immersed in all this affluence. Yet in the midst of it, we have growing numbers of people who are the working poor. Who suffer harsh working conditions. Who live highly precariously under short-term labour contracts whose terms are apt to infringe on codes of human rights protection. Recent figures have it that 16% of the working population in Japan lives below the poverty line. The countries with the lowest rate of poverty are Denmark and Sweden both with only 5.3% of the working population falling below the poverty line. Their low rates of poverty do them much credit. By comparison, for the Japanese economy with its maturity and affluence to have a poverty ratio that is three times as large as those of the Nordic nations is a very strange state of affairs.

Not only is this strange. It is scandalous. Not only is this strange and scandalous, it is also bad for the economy. Mr. Abe claims he wants to get rid of deflation in Japan. He will never accomplish this if he does not pay attention to this issue of poverty. With this many people living in poverty there is no way that Japan could ever get out of the deflationary cycle.

So how do you go about resolving this problem. The obvious answer is redistribution. Japan’s affluence is not being distributed properly. There is too much concentration of wealth. Japan’s rising Gini index indicates this. Policies need to be put in place which can redistribute the overall wealth in our hands in a more equitable fashion.

There are two very immediate ways in which this redistribution can be achieved. One is to raise wages. The other is to raise interest rates. Wage increases speak for themselves. People need to be paid more if they are to spend more. For the sake of fairness it has to be said that the Abe government has been working on this. But only through cajoling and bullying companies to raise headline wage rates. This would only drive companies to resort more extensively on short-term low paid labour.

For interest rates to start earning some money for ordinary small investors is also important. People’s deposits should reap soe interest for them. But this is not going to happen under a monetary regime which sticks with zero interest rates. Yet Japan’s monetary policy will never be able to stop the quantitative easing and the zero interest rates that go with it. This is because this great monetary easing is the only thing that is standing between the Japanese government and bankruptcy. Team Abe at the Bank of Japan has gone out of its way to turn the BOJ from a central bank into a spcialised money lender for the Japanese government. The BOJ might as well stop calling itself a central bank since propping up the government is all that they seem interested in these days.

Yet another name I have for “Abenomics” is “Dopingnomics”. It is an attempt to inject all kinds of questionable substances into the Japanese body economic so that it can start running at top speed again on the strength of very artificially pumped up muscles.

One wonders what all this is really in aid of. The suspicion deepens that it is all about “Fukoku-Kyohei”. “Fukoku” means a rich country. “Kyohei” means a strong military. Is there a hidden agenda here of building up a nation that can go to war again ? Indeed this agenda seems to become less hidden and more apparent by the day as Mr. Abe bulldozes his official secrets act through parliament.

 

 

 

 

 

 

Noriko Hama
Professor & Dean at Doshisha Business School, Kyoto

 

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Once More: Analyzing the (Chinese) PMI

The Purchasing Manager Index (PMI) serves as a well-known and quite reliable short-term indicator in an increasing number of countries. When I introduced the PMI for Sweden at Swedbank together with SILF in the year 1994, this indicator had its history only in the United States. Neutral analysts consider the quality of the Swedish PMI as fairly good, too, particularly since we then did not rush into this new indicator for “marketing reasons”. Our tests and seasonal adjustments took quite some time. In a number of other countries, the PMI preparations took considerably less time until publication. Whether the increased speed of preparation has been affecting the quality of the PMI in different countries more negatively, I am not really sure about. Nowadays, the PMI can be found all over the world, China included.

I had some comments on the two Chinese PMIs in a previous blog (from June 7, 2013). Today, I would like to make some further comments and repeat some of my previous ones (which to a high can be applied generally as well).

First, analysts and media should handle smaller monthly changes of the PMI more carefully – particularly when the PMI moves upward but still relatively closely to the 50-index level, i.e. around 51-53. An improvement from 51.4 to 52.0 does not mean a lot of a change.

Second, the PMI is a so-called diffusion index. This means that the monthly changes of the PMI – particularly when the changes are more limited – do not really express the strength of the individual changes in the index. In other words: analysts should not only focus on the direction of the PMI but also on the level. This is not always the case. The experience from Sweden is that more positive times and improvements of the business situation tend to show up more clearly when the PMI starts exceeding levels around 55. This thumb rule may, however, vary from country to country.

Third, less monthly random can be achieved when also 3-months moving averages are added to the usual graph or numbers. Thus, a limited trend interpretation is made possible.

Fourth, when it comes to China we really do not have any idea about the composition and representativeness of the selected “PMI companies “(which users of the PMIs in our part of the world do not either; but statistics in the Western part of the globe tend to have – with certain exceptions – higher statistical standards compared to statistical quality in China).

Fifth, the PMI could be the best Chinese short-term indicator all the same. When longer time series will be available, this thinkable record will be very interesting to analyze more thoroughly. And the other point to summarize is that small moves of the PMI – up or down – should not be interpreted too exactly. However, the PMI remains an interesting, fresh and quickly calculated economic indicator in many countries. Hopefully in China, too!

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

 

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Interview with Robert Shiller – “Markets Will Never Completely Understand Their Own Psychology”

November 6, 2013

Quite a number of big financial bubbles have burst in modern financial history, lately four years ago in the IT sector. Do you think that people have become more aware of psychology on financial markets or what research calls behavioral finance?

– We have seen many financial bubbles in the past. There is definitely an increasing awareness of behavioral finance. That’s new. A movement for behavioral finance has been created. But markets will never have a complete understanding of this phenomenon. I doubt that people will completely learn their lesson at any time. Part of the problem lies in the fact that it is hard to know when there really is a financial bubble.

What you have to do is to analyze carefully and judge what impact other persons’ language has on attitudes and markets. It is so difficult to have an idea about the long-term value of an asset, if markets are behaving in a herdlike way, and prices are too high. Mistakes will be made again and again.

The other thing is, of course, that lots of people disregard these facts and believe that a new era with new rules is about to start. Interpretation of behavioral finance is also a question of experience.

Right now, people say Alan Greenspan did not object to the bubble and so it can’t be a bubble. I have great respect for the man, but he could caught up in a bubble, too. This is something you realize after the fact.

Probably you are mainly referring to the booming housing sector in the U.S. Is there any way of measuring such a potential threat?

– I have given some ideas about that in several discussion papers, based on questions and surveys. It strikes me as odd that there is not more research on how people think.

This is, however, contrary to what Milton Friedman said in his Essays in Positive Economics, 1953 – that people should not be asked what they are thinking because they never can be truthful and never can explain. That thinking has dominated the economic profession for decades, looking only at actions when building the models. As a result of this, economists don’t look into minds of individuals.

A method of studying real estate bubbles is to listen to people. One thing I learned from these surveys is that many people were buying houses because of the bursting of the stock market bubble. This seems paradoxical. You might have expected that people after a stock market downturn would sell their homes to get money or that they would be depressed, and not willing to bid hard for new homes.

What happened was that people got fed up with the stock market and instead moved to real estate. People like houses because houses are visible and regarded as quite a safe investment.

However, the question remains: Do people tend to forget interest rate sensitivity when rates are very low? Why do people not consider that U.S. rates will go up in the foreseeable future?

– This is the big issue and partly a generational thing. Interest rates have been going down since the early 80’s. Younger people are just complacent about this, believing that interest rates always go down. Apart from that, there is a feeling of desperation in some areas. Los Angeles is an interesting example of this. People there seem to think that the real estate bubble will never end – or if it ends it will be at a much higher level than now.

These people worry that they can miss the chance of buying a house. They want to lock it in. They want to get the house and feel a sense of urgency. Many are borrowing very large amounts on flexible-rate mortgages because payments are affordable when interests rates are very low. They are not concerned about rising interest rates because they assume their incomes will be going up.

However, a lot can happen which people tend to forget. By the way, real interest rates are not really low in a historical perspective.

Buying a home is a very emotional decision, especially buying a home for the first time. Right now, the decision is what kind of house to buy. You could buy a depressing and affordable house, or a nicer one that will not be affordable when rates rise.

The importance of behavioral finance for financial markets is now widely accepted. However, a number of economists argue that behavioral finance now needs more support from psychological research.

What should be done?

– Much more can be done. I think we are just at the beginning. It is still at the frontier. The combination of economics and psychology is probably the most exciting area in the profession today. Mathematical economics has been dominating for some decades and has had an impressive development. But it has cut economics off from other sciences.

Meanwhile psychology, sociology. anthropology, political science and ecology are gaining momentum as factors driving economic behavior. These disciplines have to be combined with economics which is not easy to do. Academia needs more professional interaction. Especially professors have to promote this.

 

 

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