GFJ and its two sister organizations, The Japan Forum on International Relations and the Council on East Asian Community monthly organizes a "Foreign Policy Luncheon" meeting to provide an occasion for members of the three organizations to meet in an informal and confidential manner with senior officials of the Japanese Government and/or other experts and specialists in fields related to international relations. The 268th "Foreign Policy Luncheon" meeting on the topic of "The Results of Abenomics and Its Future Developments" was held on 3 September 2014. The keynote speaker was IWATA Kazumasa, President, Japan Center for Economic Research. His views are as follows.

In 1933, John Maynard Keynes sent U.S. President Franklin Roosevelt an open letter making the following three proposals: (1) cheap money (below 2.5% interest rate); (2) wise spending (flexible fiscal policy); and (3) U.S.-Britain agreement on exchange rate for stabilizing domestic prices. In accordance with this line of reasoning, Abenomics consists of (1) and (2) plus growth strategy. It is difficult to say that the current level of Japan’s economic recovery is perfect. It is also questionable how desirable the direction toward the yen’s depreciation is. If we cannot expect labor (depopulation) and capital (savings rate decline due to aging society) to be growth factors for the future, we will have no other choice but to improve the productivity of the whole economy, which requires innovation and qualitative system improvement.

(1) A Change in Growth Rates Due to the Results of Abenomics
Since the launch of Abenomics, measures to stem the yen's appreciation have been successful, stock prices have kept high and corporate and household confidences have recovered. However, the growth rates of fiscal 2013, 2014 and 2015 are projected to be 2.3%, 0.5% and 1.3% respectively, which fall short of the 2% goal defined by the Japan Revitalization Strategy. My forecast says that the real growth rate for the April-June period of 2014 will decline by 6.8% on an annualized basis from the previous quarter, and the real growth rate for the July-September period will rise by 4.2%. Unemployment rate fell to 3.8% in July and nominal wages shifted upward, but real wages have continued to show a significant decline. Increasing mid- and long-term growth rates requires “different-dimension reforms and innovation.” Putting the brakes on the depopulation trend is also effective for raising expected growth rates.

(2) A Change in Inflation Rates Due to the Results of Abenomics
The consumer price increase rate excluding perishable foods decelerated from 1.5% in April to 1.3% in July. The consumer price increase rate excluding foods and energy decelerated from 0.8% in April to 0.6% in July. The import price increase rate due to the yen’s depreciation rose by 13.6% in fiscal 2013, but it recently dropped to the 2% level. Unless GDP gaps close in the future, the upward effect of import prices will diminish. A price increase to about the middle between 1% and 2% despite deflation gaps was caused by the change of GDP gaps, and the acceleration of import-driven inflation. The most recent real foreign exchange rate is swinging slightly toward the weak yen compared with the equilibrium rate. The report of the IMF 2014 Article IV Consultation with Japan states that the achievement of the 2% inflation goal will be postponed to 2017. The report also says that the most recent price increase rate is significantly impacted by the yen’s depreciation and that the price increase rate of non-trade goods which is insusceptible to the change of exchange rates is below 0.5%. It will take at least five years to stably anchor the inflation expectation of 2%.

(3) Future Monetary Policy Management
If the core inflation rate measured by the Consumer Price Index (CPI) falls below 1%, additional monetary easing will be required. The additional monetary easing in this case can include low-interest financing for promoting growth, as well as purchases of exchange-traded funds (ETF), fiscal investment and loan program (FILP) bonds and local government bonds. However, its effect is likely to just curb prices from declining below their projected values. As of October, forward guidance on quantitative policy and interest rates for fiscal 2015 and 2016 will be necessary. It is crucial that there will be a clear prospect of correcting fiscal disequilibrium by the time when the goal of 2% inflation is achieved. The continuation of a different-dimension monetary policy will increase the risk of damaging the Bank of Japan’s balance sheet in the exit process. The government and the Bank of Japan need to have an advance consultation about how to deal with the profits and losses involved in the implementation of a different-dimension monetary policy. In addition, for the risk of financial imbalance disequilibrium, it is essential to build a new architecture for carrying out macro-prudence policy.

(4) Current Account Deficit
The current account of June posted just a slight surplus and the balance of trade and services marked a deficit in twenty-seven consecutive months. The market consensus is that the current account surplus will hold after the consumption tax hike from 5% to 8% in April. Regarding Japan’s international balance of payments structure, our country is changing from an “immature creditor country” to a “mature creditor country” since its slip into a balance of trade and services deficit twenty-seven months ago. Japan is also reaching a “credit disposition status” due to its fall into a current account deficit.

(5) The Significance of Different-Dimension Reforms
Japan should manage policies aiming to be a first-tier country that not only provides its people with rich lives but also can influence other countries. For institutional reforms, Japan can improve the productivity of the whole economy by heightening the “quality of systems,” such as the stability of political systems, the openness of markets, the resolution of gender gaps, the easiness of launching new businesses and the flexibility of the labor market. To avoid a fiscal failure and stabilize government debts and nominal GDP ratio, Japan is required to increase the consumption tax rate to at least 25%. As former U.S. Secretary of the Treasury Lawrence Summers pointed out, it is necessary for the “per capita consumption increase rate” to record plus figures in the mid and long term to prevent the “natural rate of interest” from sliding into minus figures.

(6) The Necessity of Innovation
Institutional reforms and innovation are mutually complemental. In the “Second Machine Age,” ten technologies are related to IT of the “twelve disruptive technologies” that will have dramatically transformed the economy and people’s lives by 2025. The German industrial sector is promoting the six-order industrialization of manufacturing that combines the Internet of things and services with 3D printing.

(7) A Scenario for Growth and Reforms
Economics does not have a proper theory on “optimal population scale” in a country. For the optimal population increase rate, Paul Samuelson advocates the theory of “goldest rule-economy under the golden rule.” The optimal population increase rate that maximizes consumer’s economic welfare equals return on real capital. In an economy with the overlapping working and retirement generations, the optimal population increase rate has positive relationships with the retirement generation’s consumption. At least, it is necessary to maintain the population level of 90 million on the basis of a grand strategy for one hundred years ahead by at least putting the brakes on depopulation. I propose that Japan realize a policy of accepting 200,000 immigrants every year by 2050.

(GFJ secretariat is responsible for this article)