Source: CNA – Japan’s economic rebound a recipe for Europe?
The recovery of the Japanese economy, just as a recession in Europe digs in, is renewing pressure on European policymakers to shift course from austerity to stimulus.
Data released on Thursday showed Japan’s economy grew markedly in the first quarter, only weeks after a new government and a new team at the central bank set about stoking the world’s third-biggest economy.
The 0.9-per cent quarter-on-quarter growth — or 3.5 per cent if the data were stretched over a year — confirmed Japan’s exit from recession after a decade of lost growth and deflation.
The Japanese economy has grown only an average of 0.85 per cent per year over the past two decades.
“What a difference,” remarked Berenberg bank senior economist Christian Schulz.
“A day after the eurozone announced another quarter of recession as it takes the hard route of austerity and reform, Japan’s Abenomics showed the easy way out,” he said.
“The policies of the new government under Prime Minister Abe are working,” said Schulz.
Under new leadership appointed by Shinzo Abe, the Bank of Japan has recently launched a programme of quantitative easing to double the money supply with massive purchases of assets including government bonds.
The programme has weakened the yen by over a quarter in the past six months, encouraging exports and leading the Japanese consumer to spend more.
The government has also added fiscal stimulus and pledged reforms to boost competitiveness.
Japan is taking a page out of the playbook of the US Federal Reserve, which also undertook a massive quantitative easing programme. Europe, so far, has been the odd man out.
In Frankfurt, the European Central Bank operates under tight restrictions in its statutes which are heavily influenced by a strong German aversion to anything that smacks of printing money. Germans remain highly suspicious of any policy which could spark the hyperinflation that afflicted the country between the world wars.
And coupled with this German-led caution on monetary policy, eurozone countries are pursuing austerity policies to cut budget deficits and debt while trying to make their economies more efficient and competitive.
Instead of austerity and restructuring, Tokyo is pushing fiscal and monetary stimulus, even with a debt load more than twice the size of its economy.
“The monetary policy of quantitative easing has produced beneficial results in the United States…” French Industrial Renewal Minister Arnaud Montebourg said recently
“But the inflationary risk is zero and European monetary policy can finally do it,” said Montebourg at a debate with the former chief economist at the European Central Bank, Juergen Stark.
Stark disagreed, saying “even the Americans are asking themselves if the artificially created recovery is sustainable. Letting the printing presses roll won’t help! The excessive liquidity will create a new speculative bubble.”
Amid the praise for Abenomics, the EU has been moving to temper austerity, a policy now widely criticised for making the downturn worse.
With this in mind, Portugal, Spain and now France have won more time from Brussels to cut their public deficits as growth in the eurozone continues to languish, though on condition they still pursue reforms.
European Commission President Jose Manuel Barroso said last month that while the choice of austerity “is fundamentally right, I think it has reached its limits in many aspects, because … it has to have the minimum of political and social support.”
The OECD’s chief economist Pier Carlo Padoan said recently that the eurozone had further room to ease monetary policy and that “further thought should be given to how to expand quantitative easing.”
Last year, the ECB injected more than one trillion euros of low-interest funds into banks, in what some analysts considered a form of quantitative easing that slowed the crisis.
And it has said it will buy government debt massively on the bond market, but only if the countries needing such support enact radical measures in return. This so-called OMT programme remains untested.