Stimulus gets more direct in Japan
Fresh reflation ideas are back on the agenda in Japan as inflation shows no sign of rising despite record stimulus and a tight labour market. Last week, former Federal Reserve Chairman Ben Bernanke said Japan may need to tie monetary and fiscal policy more tightly. Yesterday, a leading adviser to Prime Minister Shinzo Abe suggested the government should raise wages by administrative fiat and slap punitive taxes on cash-hoarding companies. These are familiar battle lines in Japan, but it may be that Abe has a bit of a game changer up his sleeve.
His focus is hard-pressed 30-somethings. While Japan’s savings rate has shrunk to 1% of GDP as old people rapidly “dissave”, squirrelling remains the norm; 30-39 year olds use 34% of their disposable income for saving and mortgage payments. Their low propensity to consume stems, in part, from a need to build a nest egg to fund their children’s education. The effect can be seen in rising household savings held at banks. And this is the context for a bold policy being floated by Abe’s government to offer free higher education for all 18-22 year olds.
The plan would cost JPY 5 trln ($45 bln), or 1% of GDP, which is roughly what Japan spends on defence every year. The benefit would be broadly felt as 76% of high school students go on to higher education, mostly in private colleges. A government study in 2014 found that a university freshman paid all-in fees of about JPY 1.43 mln ($12,800). With the “bank of mom and dad” on the hook for the vast majority of these costs, such a proposal has the potential to change household balance sheets far more directly than endless infrastructure projects.
Which brings us to Milton Friedman’s Permanent Income hypothesis. Japan’s experience with stimulus has been mixed due to weak multiplier effects. A government cash giveaway in 2009 of JPY 12,000 (rising to 20,000 for those over 65) saw only 30% spent, with the rest tucked under futons. This makes sense for as Friedman showed, discretionary spending is not dictated by income at a moment in time, but by long term expectations of how much a household has to play with. Hence, Abe wants to write his university fee plan into the constitution, so making it hard to reverse.
There is also a more Machiavellian calculus at work as the mooted leg-up for students is being deployed, in part, as a sweetener for another constitutional amendment to change the operating mandate of Japan’s Self Defense Force. A recent opinion poll suggested that more than half of eligible voters would support the combined constitutional package, which will need to be approved in a referendum.
The education plan has support from opposition parties — which first proposed the measure — and judging by statements in parliament this week, the government could put the matter directly to voters before December 2018; the date of the next general election.
By lessening the burden of education costs, the hope is that young couples actually have the 2.4 children they desire (according to surveys) rather than the 1.7 they currently produce. Such a move could give legs to a nascent “baby boom” happening in big cities.
As it would be a constitutionally enshrined entitlement, the government would likely issue “education bonds” as a permanent funding source. The initiative could even be a catalyst for the government and Bank of Japan to make a more honest assessment of Japan’s debt burden, which after netting out the BoJ’s government bond holdings falls to some 40% of GDP.
For the BoJ, one perk would be the creation of a new source of government paper to use in its ongoing monetary stimulus. Japan’s stealth exercise in using direct monetary financing to manage its fiscal and social obligations looks to be moving to the next level. If confirmed, the programme should be negative for the yen and will give some hope that reflation is still possible.