Eurozone now eager to copy Japan, take ‘easy way out’




Budding growth in 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 said that 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 inflation in the world’s third-biggest economy.

The 0.9 percent quarter-on-quarter growth — or 3.5 percent 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 percent 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.”

Under the new team appointed by Shinzo Abe, the Bank of Japan has recently launched an aggressive program of quantitative easing to double the money supply in two years with massive purchases of government bonds and riskier assets. The threats to weaken the yen sent stocks soaring as investors piled in for sure bets on exporters even before the plan launched earlier this year.

The program has weakened the yen by over a quarter in the past six months, boosting exports and nudging consumers to spend more.

The government has also reverted to its habit of going on fiscal stimulus binges while pledging reforms aimed at boosting competitiveness.

Japan is taking a page out of the playbook of the U.S. Federal Reserve, which has undertaken a massive quantitative easing program to keep interest rates low. Will Europe be next to try it?

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 that 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.

But instead of austerity and restructuring, Tokyo is pushing fiscal and aggressive monetary stimulus while jacking up a debt load that is more than twice the size of its GDP.

Critics say that imitating the U.S. strategy will only lead to more asset bubbles.

“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.”

Analysts at Capital Economics noted that the return to growth in Japan might give the green light to its scheduled tax hikes, which could push down consumption and send the economy back into recession.

But amid praise for Abenomics, the EU has been moving to temper austerity, a policy now widely criticized 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 over €1 trillion of low-interest funds into banks, in what was deemed by some analysts as a form of quantitative easing that slowed the crisis.

It has also vowed to make massive bond purchases, but only if the countries needing such support enact radical measures in return. This so-called OMT program remains untested.

  • paul lang

    A policy of stimulus will not work in the EU. Unlike Japan or the USA, the EU is a group of soverign nations using a common currency. Nations with strong economies and low debt are reluctant to bail out nations with weak economies and high debt levels. A solution might be to calculate a value added system that rewards those living in stronger and growing economies. For example someone living in Spain may receive 110 Euros for 100 in the Bank, while someone in Germany may receive 130 Euros, same for property valuation. Negotiations among the participants could fix a value for any stimulus, based upon objective measurements. This vaulation would compensate for the inflationary effects of stimulus, even the excessive tax liabilities which may be created.