Abenomics a Short-Run Success: Reading Hausman and Wieland: Friday Focus: March 21, 2014

Of those whom I think are the three best young macroeconomists who got their Ph.D. degrees in the past year, all three got their degrees from Berkeley, and two of the three–Johannes Wieland and Joshua Hausman–ajsut presented their rapid-response survey of the effects of Japan’s Abenomics at the Brookings Panel on Economic Activity: “Abenomics: Preliminary Analysis and Outlook”. I am not there: I am on the other coast, teaching and waiting for my mother to fly in from Albuquerque. But as I follow along it is clear to me that they have done a very good job:

Joshua K. Hausman and Johannes F. Wieland: Abenomics Preliminary Analysis and Outlook: “Japan’s great economic experiment known as Abenomics appears to be increasing the country’s immediate economic growth,

accounting for 0.9 to 1.7 percentage points of the nation’s 2013 GDP growth, but its long-term effects appear likely to be modest relative to what some had hoped, in part because Japan’s new monetary policy is not yet fully credible.

Named after Prime Minister Shinzo Abe, Abenomics includes a monetary regime shift, fiscal stimulus measures, and structural reforms, also known as the “three arrows”… a focus on the most radical arrow, the monetary policy regime shift… the Bank of Japan’s new 2 percent inflation target… large-scale asset purchases… a doubling of the monetary base… by 2015)…. The Bank of Japan is achieving its intermediate objective of higher expected inflation, but that the inflation target itself “remains imperfectly credible,” with long-run inflation expectations below 1.5 percent…. Private sector economic forecasts suggest that Abenomics will cause Japanese GDP to be 3.1 percent higher than it otherwise would be by 2022… a large achievement for any policy, especially one with little or no obvious cost… [but] unlikely to close the country’s large output gap… the modest forecast improvement for Japanese output and Japan’s booming stock market, which has been seen as evidence of Abenomics’ success….

Hausman and Wieland suggest several signals that would indicate whether Japan is likely to beat current forecasts:

• Inflation expectations—The output effects of Abenomics could as much as double if inflation expectations rose all the way to the Bank of Japan’s 2 percent target, according to their calculations.
• Real wages—Thus far, Abenomics has lowered real wages as prices have risen more than nominal wages, but the medium-run success of a higher inflation target may depend on this ending soon….
• Structural reform—The largest long-run unknown is what structural reforms will be enacted. If it becomes clearer that bold structural reforms will take place, the authors expect higher growth forecasts to be accompanied by lower inflation expectations.

The outcome of Abenomics will determine whether Japan experiences another lost decade or resumes healthy growth. Abenomics’ success may also influence policy in Europe and the U.S. As this was going to press, in March 2014, both the Federal Reserve and the European Central Bank were up against the zero lower bound, with inflation near one percent on both sides of the Atlantic.  Thus far, neither the Federal Reserve nor the European Central Bank has considered a radical regime shift. If Abenomics succeeds, that may change…

I find myself with a considerably more optimistic assessment of Abenomics, in large part because I place more weight on the stock market relative to expectations of output growth. Expectations of future output growth are not assessments of the effects of Abenomics: they are, rather, assessments of economists’ forecasts of what the effects of Abenomics will be. The stock market increase, by contrast, is both an assessment of forecasts of what the effects of Abenomics will be–by people who, unlike economists, are putting their directly money on the line–and also something that changes the incentives that businesses have to invest and expand. The stock market along with expectations of future inflation is evidence of how Abenomics is working to some extent. Economists’ forecasts are not.

It would be very very nice if it did work.