Abenomics: Preliminary Analysis and Outlook

Abstract

In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a two percent inflation target and specified concrete actions to achieve this goal by 2015. Shinzo Abe's government is supporting this change with fiscal policy and structural reforms. We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.8 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In the medium and long-run, Abenomics will likely continue to be stimulative. But the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan's large output gap. In part this is because the Bank of Japan's two percent inflation target is not yet fully credible. We conclude by outlining how to interpret future data releases in light of our results.

Are there differences in the effectiveness of quantitative easing at the zero-lower-bound in Japan over time?

“…For these real effects to occur, two aspects have to hold: (1) the monetary expansion needs to be perceived by the markets as sustainable and (2) However, it should be stressed that it is still far too early to conclusively judge on the effectiveness of 'Abenomics'. Thus, our results should be seen as a tentative and preliminary evaluation of the short-term effects of 'Abenomics', much in the line and spirit of Hausman and Wieland (2014).…”

“…25 As Hausman and Wieland (2014) outline, the first QE program was perceived as temporary. Although the broad money aggregate M3 increased after the beginning of the first QE program, the increase was rather small.…”

“…Further specifics are a maturity extension of the BoJ's holdings of Japanese Government Bonds and its commitment to continue expanding the monetary base until inflation stabilises at its 2% target. Although the preliminary evaluation of this much more expansionary monetary policy stance is widely regarded as supportive for the growth stimulus to the Japanese economy, it is unclear how these measures will play out in the medium and longer run (see also Hausman and Wieland (2014) for a preliminary evaluation of 'Abenomics').…”

Supply-Side Policies in the Depression: Evidence from France

“…For instance, the hope that higher expected inflation will promote recovery has motivated current Japanese monetary policy ("Abenomics") (Hausman and Wieland, 2014). The standard new Keynesian model provides a justification for such policies, since the model implies that raising inflation expectations when nominal interest rates are fixed is expansionary.…”

Japanese monetary policy and international spillovers

“…Compared to the sample that includes the post-2000 period, here the negative response of the U.S. output gap to the yen depreciation is much larger; a similar depreciation of the yen lowers the U.S. output gap by 3 times as much. 14 In about 9 quarters, however, the impact of the depreciation of the yen on the U.S. output gap is back to zero. A decline in Japanese short-term interest rates increases the U.S. output gap from the short run; again a loosening of Japanese interest rates has been stimulative.…”