The Daily Update - Japan & Growth

The efficacy of negative interest rates has been a well debated topic with Mark Carney, the Governor of the Bank of England, making clear his view clear with an emphatic dismissal of the use of this policy tool: "I’m not a fan of negative interest rates. We've seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don't need to go to that resort." For him “the effective lower bound is a positive number, close to zero.”

The BoJ undertook its own experiment with negative rates earlier this year but amidst the uproar about the impact on bank profitability and an undesirable further strengthening of the Yen it seems to have tempered the use of this policy tool recently, favouring instead a modest increase in QE through increased ETF purchases. This accompanies the government’s announcement of a further stimulus package. Arguably, another stimulus package only delivers more of the same and risks doing little more than providing yet another temporary boost to growth. More recently, the IMF has been an advocate of a ‘fourth arrow’, policies to raise wages, a demand driven boost to growth, given policies have so far failed to produce a sustainable growth recovery. Q2 GDP fell to only 0.2 percent annualised, down from 2 percent in Q1, hence alternative policies may prove tempting.

Could a wage increase in Japan stimulate growth? It could potentially reduce Japan's competitiveness unless Japan’s other major trading partners adopt a similar approach, or unless productivity offsets any negative impact. It is also unclear how the transfer of wealth will manifest: a worker may enjoy higher wages but this must be funded out of corporate profits and it is unclear how much of this cost can be offset by increased sales revenue from any consumption boost. If structural reforms boost productivity then the benefit could be much greater. That said, Japan faces the negative structural trend of an ageing population: The EC’s work on demographics shows the dependency ratio (the number of people aged 65 and over as a percent of the labour force (aged 15-64)) is forecast to rise from 35.1 percent in 2010 to 73.8 percent by 2050 which presents a sizeable headwind to growth.

One of the challenges facing governments around the world is that insipid growth has not only come at a time of elevated global debt levels but has also been accompanied by an increase in inequality. For the average consumer wage increases are important drivers of confidence and increased discretionary spending but even in the US real median household income has declined since 2007. In Japan studies suggest inequality appears less pronounced than elsewhere with factors such as growth in executive pay less pronounced than places such as the US. A Piketty approach looking at the total personal income (ex-capital gains) from the top 1 percent of earners even shows it has levelled off in Japan (9.5 percent of national earnings in 2008 versus 9 percent in 2012). Nevertheless, the IMF note that full-time wages in Japan have only increased by 0.3 percent since 1995 so it comes as little surprise the economic recovery has continued to falter.

What is clear from all this is that policy around the world is increasingly going into unchartered territory with little success so far in boosting aggregate demand. The outlook remains uncertain and the hunt for yield continues: high quality bonds from creditors, particularly those offering positive yields, remain one of the more attractive places to be positioned.