The growth of China over the past decade has been quite phenomenal, with figures recorded in double-digits. However, in the aftermath of the recession, growth has declined to around 7% – much higher than Western economies are used to, but significantly below the ‘norm’ for China. (Click here for a PowerPoint of the chart.)
The growth target for this year is 7.5%, but there appear to be some concerns about China’s ability to reach this figure and this has been emphasised by a recent Chinese policy.
A mini-stimulus package has been put in place, with the objective of meeting the 7.5% growth target. Government expenditure is a key component of aggregate demand and when other components of AD are lower than expected, boosting ‘G’ can be a solution. However, it’s not something that the Chinese government has had to do in recent years and the fact that this stimulus package has been put in place has brought doubts over China’s economic performance to the forefront , but has confirmed its commitment to growth. Mizuho economist, Shen Jianguang, said:
It’s very obvious that the leaders feel the need to stabilise growth…Overall, the 7.5 per cent growth target means that the government still cares a lot about economic growth.
Data suggest that growth in China is relatively weak and there are concerns that the growth target will be missed, hence the stimulus package. In the aftermath of the 2008 financial crisis, there was a large stimulus package in place in China. This latest investment by the government is in no way comparable to the size of the 2008 package, but instead will be on a smaller and more specific scale. Mark Williams of Capital Economics said:
It’s a bit of a rerun of what we saw last year – something less than a stimulus package and more of piecemeal measures to ensure they reach their growth target.
It is the construction of public housing and railways that will be the main areas of investment this time round. A sum of $120–180bn per year will be available for railway construction and $161bn for social housing, and tax breaks are being extended for small businesses.
The 2008 stimulus package saw debt increase to some 200% of GDP, which did cause growing concerns about the reliance on debt. However, this latest package will be financed through the issue of bonds, which is much more similar to how market economies finance spending.
The fact that the government has had to intervene with such a stimulus package is, however, causing growing concerns about the level of debt and the future of this fast growing economy, though the new method of financing is certainly seen as progress.
It should be noted that a decline in growth for China is not only concerning for China itself, but is also likely to have adverse consequences other countries. In the increasingly interdependent world that we live in, Western countries rely on foreign consumers purchasing their exports, and in recent years it has been Chinese consumers that have been a key component of demand. However, a decline in growth may also create some benefits – resources may not be used up as quickly and prices of raw materials and oil in particular may remain lower.
It is certainly too early for alarm bells, but the future of China’s growth is less certain than it was a decade ago. The following articles consider this issue.
China’s new mini-stimulus offers signs of worry and progress BBC News, Linda Yueh (3/4/14)
China puts railways and houses at hear of new stimulus measures The Guardian (3/4/14)
China unveils mini stimulus to to boost slowing economy The Telegraph (3/4/14)
China stimulus puts new focus on growth target Wall Street Journal, Bob Davis and Michael Arnold (3/4/14)
China embarks on ‘mini’ stimulus programme to kick-start economy Independent, Russell Lynch (3/4/14)
China takes first step to steady economic growth Reuters (2/4/14)
China unveils fresh stimulus The Autstralian (3/4/14)
China’s reformers can triumph again, if they follow the right route The Guardian, Joseph Stiglitz (2/4/14)
Questions
- How has Chinese growth reached double-digits? Which factors are responsible for such high growth?
- The BBC News article suggests that the stimulus package is cause for concerns but also shows progress. How can it do both?
- Using a diagram, illustrate how a stimulus package can boost economic growth.
- What are the advantages and disadvantages of high rates of growth for (a) China and (b) Western economies?
- Why does the method of financing growth matter?
- Railway and housing construction have been targeted to receive additional finance. Why do you think these sectors have been targeted?
It is one year since the election of Shinzo Abe in Japan. He immediately embarked on a radical economic policy to stimulate the Japanese economy, which had suffered from years of stagnation. There have been three parts (or three arrows) to his policy: fiscal policy and monetary policy to stimulate aggregate demand and supply-side policy to increase productivity.
As the previous post explains:
“The first arrow is monetary policy. The Bank of Japan has engaged in extensive quantitative easing through bond purchases in order to drive down the exchange rate (see A J-curve for Japan?), stimulate expenditure and increase the rate of inflation. A target inflation rate of 2% has been set by the Bank of Japan. Part of the problem for the Japanese economy over the years has been stagnant or falling prices. Japanese consumers have got used to waiting to spend in the hope of being able to buy at lower prices. Similarly, Japanese businesses have often delayed stock purchase. By committing to bond purchases of whatever amount is necessary to achieve the 2% inflation target, the central bank hopes to break this cycle and encourage people to buy now rather than later.
The second arrow is fiscal policy. Despite having the highest debt to GDP ratio in the developed world, Japan is embarking on a large-scale programme of infrastructure investment and other public works. The package is worth over $100bn. The expansionary fiscal policy is accompanied by a longer-term plan for fiscal consolidation as economic growth picks up. In the short term, Japan should have no difficulty in financing the higher deficit, given that most of the borrowing is internal and denominated in yen.
The third arrow is supply-side policy. On 5 June, Shinzo Abe unveiled a series of goals his government would like to achieve in order to boost capacity and productivity. These include increasing private-sector investment (both domestic and inward), infrastructure expenditure (both private and public), increasing farmland, encouraging more women to work by improving day-care facilities for children, and deregulation of both goods, capital and labour markets. The prime minister, however, did not give details of the measures that would be introduced to achieve these objectives. More details will be announced in mid-June.”
In the webcast and article below, Linda Yueh, the BBC’s Chief Business Correspondent, considers how effective the policies are proving and the challenges that remain.
Webcast
Has Abenomics fixed Japan’s economic fortunes? BBC News, Linda Yueh (16/12/13)
Articles
Why Abenomics holds lessons for the West BBC News, Linda Yueh (13/12/13)
Japanese business confidence hits six-year high, Tankan survey shows The Guardian (16/12/13)
Data
World Economic Outlook Database IMF (Oct 2013)
Bank of Japan Statistics Bank of Japan
Economic Outlook Annex Tables OECD
Country statistical profile: Japan 2013 OECD (15/11/13)
Questions
- Demonstrate on (a) an aggregate demand and supply diagram and (b) a Keynesian 45° line diagram the effects of the three arrows (assuming they are successful) in meeting their objectives.
- Why has Japan found it so hard to achieve economic growth over the past 20 years?
- How has the Japanese economy performed over the past 12 months?
- What lessons can be learnt by the UK and eurozone countries from Japan’s three arrows?
- Why is the second arrow problematic, given the size of Japan’s general government debt? Does the proportion of Japanese debt owed overseas affect the argument?
- In what ways do the three arrows (a) support each other; (b) conflict with each other?
- Why is the structure of the labour market in Japan acting as a break on economic growth? What policies are being, or could be, pursued to tackle these structural problems?
Since coming to office in December 2012, Shinzo Abe’s government has been determined to revive the Japanese economy. For the past 20 years, Japan’s growth has averaged only 0.8% per annum. This compares with 1.3% for Germany, 2.3% for the UK, 2.6% for the USA, 4.9% for South Korea and 10.4% for China.
Japanese real GDP per capita was only 14.5% higher in 2012 than 20 years earlier. This compares with figures for Germany, the UK, the USA, South Korea and China of 27%, 45%, 34%, 126% and 497% respectively.
So what has the Japanese government done to boost both short-term and long-term growth after years of stagnation? There are ‘three arrows’ to the policy, targeted at reviving and sustaining economic growth.
The first arrow is monetary policy. The Bank of Japan has engaged in extensive quantitative easing through bond purchases in order to drive down the exchange rate (see A J-curve for Japan?), stimulate expenditure and increase the rate of inflation. A target inflation rate of 2% has been set by the Bank of Japan. Part of the problem for the Japanese economy over the years has been stagnant or falling prices. Japanese consumers have got used to waiting to spend in the hope of being able to buy at lower prices. Similarly, Japanese businesses have often delayed stock purchase. By committing to bond purchases of whatever amount is necessary to achieve the 2% inflation target, the central bank hopes to break this cycle and encourage people to buy now rather than later.
The second arrow is fiscal policy. Despite having the highest debt to GDP ratio in the developed world, Japan is embarking on a large-scale programme of infrastructure investment and other public works. The package is worth over $100bn. The expansionary fiscal policy is accompanied by a longer-term plan for fiscal consolidation as economic growth picks up. In the short term, Japan should have no difficulty in financing the higher deficit, given that most of the borrowing is internal and denominated in yen.
The third arrow is supply-side policy. On 5 June, Shinzo Abe unveiled a series of goals his government would like to achieve in order to boost capacity and productivity. These include increasing private-sector investment (both domestic and inward), infrastructure expenditure (both private and public), increasing farmland, encouraging more women to work by improving day-care facilities for children, and deregulation of both goods, capital and labour markets. The prime minister, however, did not give details of the measures that would be introduced to achieve these objectives. More details will be announced in mid-June.
The following videos and articles look at the three arrows of Abenomics and the effects they are having on confidence and attitudes as well as on expenditure, output and the exchange rate. They also look at the crucial third arrow: at whether supply-side reforms will be enough to achieve a sustained increase in economic growth.
Videos
Abenomics an uncertain future for most Financial Times on YouTube, Ben McLannahan (30/5/13)
Assessing Abenomics NHK World (3/6/13)
Adam Posen on Abenomics NHK World (30/5/13)
Japanese concerned over ‘Abenomics’ AlJazeera on YouTube (30/5/13)
Abenomics – the cure for deflation? BBC News, Rupert Wingfield-Hayes (10/5/13)
Japan PM’s economic speech ‘short on detail’ BBC News, Rupert Wingfield Hayes (5/6/13)
Pretty Positive on Abenomics Bloomberg, Jan Hatzius, Goldman Sachs (5/6/13)
Why Abenomics is Bonkers: Pro CNBC, Graeme Maxton, (27/5/13)
‘Abe’nomics Not About BOJ Printing Money Bloomberg, Derek Halpenny (31/5/13)
Abenomics Aims `Third Arrow’ at Business Rules Bloomberg, Willie Pesek (5/6/13)
Analysis on Abe’s Growth Plan NHK World (5/6/13)
Articles
Will three arrows find their target? On Line Opinion, Andrew Leigh (6/6/13)
Japan Fires ‘Third Arrow,’ but Will It Work? CNBC, Dhara Ranasinghe (5/6/13)
Japan’s ‘3 Arrows’ May Run Into German Wall CNBC, Michael Ivanovitch (19/5/13)
Japan’s recovery – the power of Abe’s three arrows Commonwealth Bank, Australia, Melanie Timbrell (31/5/13)
So Far, the Battery Charger Is Working in Japan The New York Times, Jeff Sommer (18/5/13)
Abenomics Could Light A Fire Under The Japan Trade Again Business Insider, Matthew Boesler (4/6/13)
Japan’s New Prime Minister Unveils The ‘Most Important’ Plank Of Abenomics Business Insider (5/6/13)
Japan PM pledges to boost incomes by 30% Channel NewsAsia (5/6/13)
Abe’s growth strategy disappoints economists, investors The Asahi Shimbun (6/6/13)
Abenomics Won’t Be ’Magic Bullet’ for Japan, Says Johnson of MIT Bloomberg, Cordell Eddings (5/6/13)
Too soon to call time on Abenomics BBC News, Stephanie Flanders (19/6/13)
Abenomics: The objectives and the risks BBC News, Puneet Pal Singh (19/7/13)
Data
World Economic Outlook Database IMF
Bank of Japan Statistics Bank of Japan
Economic Outlook Annex Tables OECD
Country statistical profile: Japan 2013 OECD
Questions
- Demonstrate on (a) an aggregate demand and supply diagram and (b) a Keynesian 45° line diagram the effects of the three arrows (assuming they are successful) in meeting their objectives.
- What will determine the effectiveness of the first two arrows in boosting short-term economic growth?
- Would you characterise the policies of the third arrow as interventionist or market-orientated, or as a mixture? Explain.
- What are the dangers in ‘Abenomics’?
- Find out what has been happening to Japanese bond rates. What are the implications of this for monetary policy?
- What are the ‘markets telling Abe’?
- In what ways will expectations influence the effectiveness of Abenomics?
