The current mood of Japan is all for Abenomics. It is very surprising to hear many commentators and columnists writing so positively about Abenomics and its monetary policy. It was not too long ago that many of them were quite hesitant to welcome Mr. Abe and the Reflationists’ policy. It is as if the whole nation repented and converted.
This type of phenomenon is not out of character of Japanese context. Once the tide, so to speak, of the general consensus — be it over politics, economy, or science — changes, many people who used to oppose the now-triumphant view quickly convert. Then they renounce the now-heretical view that they once held so dear. This is a dangerous tendency and the national weakness, but I should speak about this national tendency elsewhere. In any case, given this sort of national tendency, I appreciate those who stick with the original position even though I may not agree with them.
Among all the critics of Abenomics, one person stands out. His book still is selling well in spite of the shift in the general consensus. Professor Seki Obata of Keio University continues to warn people of the danger of Abenomics. His popular book is entitled, “Reflation is Dangerous” (Refle wa yabai).
The book is written in a very colloquial Japanese. His use of Yabai (“dangerous”) caters to the general mass rather than to the usual book-reading demographic. His writing style is almost too easy for those who read serious books. But his strategy works. His is one of only few popular books that are critical of Abenomics still in bookstores today.
So what is Professor Obata’s main problem with Abenomics? One of the main points of his criticism is based on his understanding of interest rate. He argues that the reflation policy and Abenomics ultimately raises the interest rate of Japanese Government Bond (JGB) and hence lowering the price of the bond. Since the government relies so heavily on the bond to finance itself, the devalued bond detracts investors. It then triggers the danger of default. This, argues Dr. Obata, is the beginning of the end.
Professor Obata’s point on the devalued bond price is also related with the devalued yen. Domestically, the declining rate of JGB might not seem as drastic, but he argues that once the exchange rate is inserted in the equation, the rate is rather sweeping.
Other arguments of the book are rather standard and commonly voiced by many critics of drastic monetary policy from the U.S. to Europe. For example, Dr. Obata argues for the inefficiency of the increased monetary base due to a lack of demand for cash. Or he argues that Japan needs more innovation, not financial policy.
But his main criticism concerning the interest rate and the devalued JGB is a serious one. Currently, the Bank Of Japan is buying long-term bonds precisely to guard against the rapid increase of the interest rate and hence the decrease of the price of JGB. And yet, we saw the interest rate fluctuate wildly last week and half. For now, the rate is somewhat stable and has now increased drastically, but it needs to be watched carefully.
One important thing to remember is that the increase in the interest rate will be canceled out with a moderate inflation. What do I mean? The interest rate may rise by two percent, which is rather drastic in the regular dealing of things. But if the moderate inflation (2-3%), as the BOJ tries to create, accompanies the increase of the interest rate, it basically means that nothing really has changed.
This is the application of what Paul Krugman has been saying for a few years. Krugman has argued for the moderate inflation. Given the near-zero interest rate endorsed by central banks in developed nations, the interest rate could not be lowered any longer. So in order to lower real interest rate (not the nominal rate), a moderate inflation is necessary.
This does not dismiss all the weight of Dr. Obata’s argument, but the reality is not as dark as he likes to portray. Of course, the BOJ needs to carefully monitor the interest rate and needs to continue its drastic monetary policy. Also the government needs to work so much harder to decrease its debt while the economy is on a sunny-side.
Indeed Japan is at the historic crossroad. Professor Obata is right about this. But should he be so gloom and spit out a jeremiad against the current economic situation? We of course need to carefully monitor the BOJ and the current administration and not to simply get on the bandwagon of the triumph of Abenomics. But is this the beginning of the end? I don’t think so.