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we're speaking today with Wharton
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Finance Professor Franklin Allen about
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Japan's recent sharp change in direction
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for economic policy thanks for joining
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us great to be you um with the recent
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election of prime minister Shinzo ABI
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there's been a fairly dramatic change in
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economic policies uh which he
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telegraphed ahead of time but it looks
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like it's a reaction to a long-term
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Trend in Japan which is which is pretty
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well known 20 years of economic
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stagnation deflation um and lately a
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loss of competitiveness also um fiscal
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stimulus and loose monetary policies
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have been tried many times in Japan over
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the years but um a lot of critics say
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they were half measures and that in the
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case of monetary policy that that
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stimulus was withdrawn too soon before
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it was actually able to to jumpstart the
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economy uh this time things look
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different looks like a real shakeup um
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and I'm wondering what if you see this
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as a as a huge change in Direction and
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what you think is going to happen as a
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result
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it raises the very interesting question
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if something doesn't work very well what
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should you do should you try something
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else or should you try harder and I
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think up until now the conclusion has
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been we should try something else and
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now prime minister AB has brought back
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the issue of well let's try harder at
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what we did and and try again and I
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think part of that is driven by what
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the Japanese sea going on in the US and
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in Europe where we have central banks
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essentially going out and either in in
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the case of the US US with QE infinti
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buying large amounts of bonds on a
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regular basis printing money to do it
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and in the Europe in in the ECB we see
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with the outright monetary transaction
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program the potential for the ECB to
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also buy out very large amounts of
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government bonds now the interesting
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thing is that in the UK there's now
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begun a discussion since they've also
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had quantitive easing in in Fairly large
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proportions and Bank of England now
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holds a great deal of government debt on
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its balance sheet about what's the next
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step and fairly serious people there
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such as uh Lord Adair Turner who was the
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head of the financial services as
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Authority have suggested that they go
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one step further so if if you go out and
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print money to buy bombs why not take it
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another step and go out and print money
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and give it to people and monetize the
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debt now in Japan they haven't got that
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far yet but um prime minister AB wants
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to go out and start having the bank of
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Japan have a much higher inflation
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Target 1% as 2% rather than the current
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1% and he also wants to have fiscal
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stimulus and he also wants to have more
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Bond buying more purchase of assets by
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the bank of Japan
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now the interesting thing is is what
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will be the effects of these if you do
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it in small amounts it seems as though
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it doesn't have that much effect you
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chairman banki has has uh argued that
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it's had very positive effects in ter
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not not huge positive effects but
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positive effects on things like
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employment and and the out output of the
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economy and so on you know one of the
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other views which interestingly uh
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Governor Shir carwa put at the IMF
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meetings back at the end of last year
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was that this quantitive easing has an
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effect but it has a big effect on
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emerging economies and if we look at
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what's happened in in Brazil there has
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been a huge run up in asset prices the
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currency has strengthened a great deal
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and that put their manufacturing sector
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under tremendous strain and growth in
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Brazil has now stopped so there are
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these effects within the economy and
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they're also effects globally now quite
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what effect will happen with Japan we
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will see I think we've already seen a
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very large change in the exchange rate
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much larger than we've seen seen for
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some time in Japan and I presume that
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that's not in response to actually the
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the moves the bank of Japan has already
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made because those have been relatively
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small they they've promised to try to
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get inflation up to to 2% as soon as
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possible whatever that means the bond
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buying program that they announced is
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going to be starting 2014 so it's some
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time away and by and large the measures
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that that actually were announced were
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not that big but I think what the
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markets are probably expecting is a new
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CL coming in that will do radically
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different things in terms of all these
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these measures now the real problem is
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that although in the press and so on
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people talk about these things as though
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it's turning a
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dial it's not really like that and we're
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we're in a lot of uncharted waters I
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would say we don't know what happens if
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you go out out and have these long run
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Bond buying programs it seems as though
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they haven't been too successful in
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Japan in the past maybe they didn't try
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it enough but there is as you mentioned
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in your question your the as you
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mentioned in your introduction initially
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there is a long run run of loss of
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competitive among many Japanese
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companies if you look at companies like
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sharp and Panasonic it's not at all
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clear these companies which 10 to 20
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years ago dominated their
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Industries it's not clear that they're
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going to be able to survive and I think
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a part of this is these monetary
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measures have pernicious long-term
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effects if we try them even harder we
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may have inflationary effects and I
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think we don't really know what will
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happen and and uh we'll see what what
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what what happens as I say in the UK
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they're talking about printing money and
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handing it out to people in uh in Japan
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it'll be interesting to see how soon if
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ever they get to that point but they're
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really out ahead of us everybody has
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been saying we don't want to be Japan
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but it looks as though most countries
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are following on very much in the
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footsteps of Japan with slow growth and
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um just the economy is stagnating we're
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now 5 years into the crisis at least and
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we're still not doing very well we're
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not in the US we're we're sparing along
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but that's with huge monetary stimulus
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and significant fiscal in the Euro Zone
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they have significant monetary stimulus
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not fiscal stimulus but they're of
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course
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shrinking you said that uh the US and
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Europe seem to be following Japan's old
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policies what what are those policies
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that um have created similar conditions
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in Europe and the US that Japan has been
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seeing over the last 20 years well they
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had tremendous fiscal stimuluses for
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much of the
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time uh they had Public Works and
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they've had very low interest rates for
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many years now none of these have solved
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the problem they're still growing at
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very slow rates and they were very hard
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hit by what happened after the default
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of lhan so their GDP fell around
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10% within a year basically around a
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year and this was a tremendous blow but
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this wasn't really too much to do with
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their financial system because their
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Banks weren't in trouble and by and
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large um it wasn't a financial crisis
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there but they were very B badly hit by
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the drop in in World
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Trade is it is it the case that they
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actually call it they don't say the
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Great Recession in Japan they say the
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Leman
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recession I believe that's true it's
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interesting um the other thing is that
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um that what Japan is doing now with you
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know monetary stimulus and trying to hit
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a 2% inflation Target because they've
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had deflation for so long um and of
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course inflation is a two-edged sword a
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little bit might be a good thing but
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then how do you keep it at a little bit
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and not go beyond that and and but then
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they're also doing fiscal s which seems
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different than what certainly Europe is
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doing which is the opposite of fiscal
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stimulus they're imposing austerity in
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most cases and um and now they're doing
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some quantitative easing so they're
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they're doing something very different
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than Japan's new policy um part of it's
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the same but but a key part is very
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different the US did some fiscal
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stimulus but that's been over for a long
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time and now we're in austerity mode
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with state and federal government
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spending uh down down quite a bit over
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few years so um so so Japan in a way is
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doing something different than either
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the us or Europe and and different than
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what it's done in the past to some
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degree so uh in in in volume at least so
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at the moment it's not doing anything
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that radically different to what it's
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done before but I think when the new
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Bank of Japan team gets in that that may
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change drastically and and that's why
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the exchange rates
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changed the interesting question is what
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the what the risks are why didn't they
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do it before well there are a lot of
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risks
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involved as you
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suggested you can't guarantee that
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inflation's only going to be 2% and it
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could well be that we suddenly get a
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wave of inflation because for example if
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uh households start to worry about
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what's going to happen to interest rates
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rates they may suddenly move money out
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the exchange rate may weaken even more
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than it has done interest rates on
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government bonds in Japan are incredibly
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low much much lower than in the US or or
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Europe except for Switzerland and so uh
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there's huge scope for a big rise in
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interest rates which given the level of
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their debt would also be very risky and
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so there are very much upside risks in
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what they're doing and that's why the
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bank of Japan has in my view quite
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prudently avoided these risks previously
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maybe now Japan with the problems with
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China and and the uh the drop in GDP at
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the end of last year has to try other
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things but there are risks involved and
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the rest of the world will look hard if
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they have a big meltdown of some kind
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which could
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happen uh so when we last spoke in
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November uh you made a a couple of
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predictions that have turned out to be
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correct uh you more or less predicted
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that uh Abby would be the new prime
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minister uh you predicted that um I
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believe because he's much more of a
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nationalist um and there's problems
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between Japan and China over this island
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dispute or series of islands that uh
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relations would deteriorate which they
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have and you also said that there's a
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possibility that the Yen might begin to
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deteriorate quite a bit and and quite
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quickly which has actually happened I
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mean I think it's been um since October
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it's it's depreciated about 10 or 12% so
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you've got a great track record there so
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uh as difficult as it is to look ahead
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what what what do you think is most
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likely for Japan over the next six
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months to a
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year it's a very difficult one to
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predict the the first difficulty is over
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the islands dispute so uh a few days ago
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they steep
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back but then the detentions keep coming
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back so uh we'll see how that plays back
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plays out but that's clearly a a big
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factor in inh what will happen in the
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Japanese economy because their their
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exports to China and the businesses in
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China have not been doing well and it
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seems that the the islands dispute is
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part of that
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the usual view is that Japanese
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companies will do much better with a
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weaker Yen and their various
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calculations as to how much the profits
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of Toyota and Honda and the other
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Japanese companies improve for each uh
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change of a Yen against the dollar and
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certainly there are those short run
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effects so company profits are likely to
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go up and the stock markets reacted but
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in the long run it doesn't seem that
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this solves their problems because if
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you look back over the last few years
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the exchange rate has varied a great
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deal and it has never really got them
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back on track and I think this is the
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thing that they need to to worry about
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they may do better over the next few
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months exchange rates do help in the
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short run but they have a real long-term
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competitiveness problem and that's what
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they need to start thinking about how to
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address in particular they have problems
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now competing with Korean firm so if you
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think about Samsung and LG these
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companies are doing much much better
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than than sharp and Panasonic or or or
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even Sony and
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so it's not just Electronics now it's
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also in the Auto industry Hyundai has
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been doing very well um Japanese car
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companies are still strong but they're
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not in the dominant position that they
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were um maybe a decade ago so I think
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this is Japan's long-term problem these
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policies
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have not worked and the real the real
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difficulty is that they are not the
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strong competitive economy that they
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used to be and I think they will try
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these policies I don't think that they
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will be successful in the medium to long
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run although they may have positive
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effects in the long run there are these
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big upside risks we talked about a few
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minutes ago but there's also this long
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run competitive problem and they need to
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start thinking how do we solve that
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problem so if they saw these policies as
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a short-term fix that buys them time to
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make structural changes which I think
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you're you're talking about what are
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those structural changes what are the
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changes that would help them in the long
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run and the medium
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run I think they need more
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competition that's what what they lack
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what what the Japanese were so very good
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at 20 to 30 years ago was just competing
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globally now the domestic firms never
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quite got that and I I think the problem
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is
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that the general lack of competitive has
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spread to more sectors in the Japanese
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economy and they they need to RSE that
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by having more competition and it'll be
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interesting to see what the Japanese
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government's reaction is to a major
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bankruptcy in in the electronics
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Industry whether they will allow that or
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whether they will force some of the more
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healthy firms to take over the weaker
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firms and preserve employment that way
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and I think they need to think hard
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about how to introduce competition and
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make Japanese companies more competitive
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is that a matter of regulatory change
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internally becoming more competitive
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what what does that look like to become
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more competitive for
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Japan so many people believe that
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allowing hostile takeovers would be one
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way of doing that my own viewers I'd be
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very surprised if they did that but
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making foreign
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entry easier making um foreigners able
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to more easily
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compete is one way to do that but it's
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it's a very difficult problem which I
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think every country is currently dealing
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with which is how do you how do you get
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growth going and what does that and the
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problems in the financial system have
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made it very difficult for most
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countries to grow there are exceptions
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as I say Korea over the last few years
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has done pretty well but that that's
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that's the exception there aren't many
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countries currently introducing policies
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which seem to be leading to
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competitiveness and
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uh and companies growing now in the the
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the currency issue is is one of the big
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issues there because the whole issue of
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currency Wars is one which countries may
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try to
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adopt okay so thank you very much for
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talking with us today it's my pleasure
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thank you Steve
