TIME Japan

It May Be Too Late for Japan’s PM to Fix the World’s Third Largest Economy

Shinzo Abe
Japan's Prime Minister Shinzo Abe visits the Santa Lucia Hill Japanese Gardens in Santiago, Chile, on July 31, 2014 Luis Hidalgo—AP

Shinzo Abe is desperate to rescue his failing economic program, but he still hasn't done what's necessary

Tokyo is abuzz with speculation that Prime Minister Shinzo Abe is about to dissolve the Diet, as the country’s legislature is known, and call a snap election.

He by no means has to take such action. It has only been two years since his Liberal Democratic Party, or LDP, swept to power in a massive landslide, and the opposition is in such disarray that there is little doubt Abe would be returned to office in a new election. Nevertheless, Abe apparently feels the need for another vote of confidence from the public, likely in part to bolster support for his radical program to revive Japan’s economy, nicknamed Abenomics.

The problem is that it could already be too late. Abenomics is a failure, and Abe isn’t likely to fix it, no matter how many seats his party holds in parliament.

When Abe first introduced Abenomics, many economists — most notably, Nobel laureate Paul Krugman — believed the unconventional program would finally end the economy’s two-decade slump. The plan: the Bank of Japan (BOJ), the country’s central bank, would churn out yen on a biblical scale to smash through the economy’s endemic and destructive cycle of deflation, while Abe’s government would pump up fiscal spending and implement long-overdue reforms to the structure of the economy. Advocates argued that Abenomics was just the sort of bold action to jump-start growth and fix a broken Japan, and we all had reason to hope that it would work. Japan is still the world’s third largest economy, and a revival there would add another much-needed pillar to hold up sagging global economic growth.

However, I had my concerns from the very beginning. In my view, Japan’s economy doesn’t grow because there is a lack of demand. Pumping more cash into the economy, therefore, will not restart growth. Only deep reform to raise the potential of the economy can do that — by improving productivity and unleashing new economic energies. Unless Abe changed the way Japan’s economy works — and I doubted he would — all of the largesse from the BOJ would at best come to nothing. In a worst-case scenario, Abe’s program could turn Japan into an even bigger economic mess than it already is.

So far, Abenomics has disappointed. GDP shrank a hope-dashing annualized 7.1% in the quarter ending June. Inflation, meanwhile, is nowhere near the BOJ target of 2%, and is slowing. Nor has Abenomics brought significant benefits to the general populace. Job creation and wage increases are sluggish and, with prices increases, the welfare of the average salaried worker has suffered. Meanwhile, an increase in consumption tax earlier this year — made necessary by the need to shore up the government’s shaky finances — further burdened Japanese households and led to a drastic decline in consumer spending.

The response of policymakers has been to double down on Abenomics. On Oct. 31, the BOJ surprised markets by greatly expanding its unorthodox stimulus program, known as quantitative easing, or QE. As part of that, the BOJ will increase its annual purchases of Japanese government bonds by 60% to a staggering $700 billion. More of the same, however, will just have the same result: a short-term boost to sentiment with little lasting effect. In fact, the program is only perpetuating Japan’s bad habits. The extra BOJ cash is weakening the yen — the Japanese currency has tumbled by nearly 7% against the dollar just since the bank’s announcement — which hands Japan Inc. companies more competitiveness without forcing them to undertake any actual improvements.

The problem with Abenomics, therefore, remains the same. More yen printed by the BOJ can’t fix Japan on its own, and can’t replace the fundamental changes necessary to raise the economy’s potential growth. If anything, the BOJ’s latest action only buys Abe a bit more time to implement his pledged reform program, known at the “third arrow” of Abenomics.

So far, though, the third arrow has remained in his quiver. In June, Abe unveiled the latest elements of the plan, which included everything from lowering the corporate-tax rate to spur investment, to enlisting more women into the male-dominated workforce, and bringing further change to an unproductive and outdated agricultural sector. It would be unfair to say that Abe has made no progress on his promises. The number of working women, for instance, has been on the rise under his administration. But many important reforms remain stalled. Abe had announced the formation of “special economic zones,” which would be crucibles of experimentation with the deep deregulation necessary to spark entrepreneurship and investment, but their implementation has crept along at a glacial pace. Serious reform of the country’s distorted labor market seems to have slipped off the table. Abe is also foot-dragging on opening the economy to more competition by holding up the completion of the U.S.-sponsored Trans-Pacific Partnership free-trade pact over an unwillingness to expose Japan’s overly protected farmers to imports.

The big question is whether another election will somehow lead to faster reform. In theory, a fresh mandate could give Abe the added political clout he needs to press ahead more boldly. However, Abe already controls both houses of the Diet, so if he wanted to move more quickly on reform, he could. That has left some analysts wondering what difference an election may make. “A snap election could have the virtue of giving the government a stronger mandate as it struggles to push ahead with structural reform,” commented Mark Williams and Marcel Thieliant of research outfit Capital Economics. But since Abe’s party has already been in a strong position, “an election would not make much practical difference to his ability to get things done.”

Abe continues to insist he is a reformer and will follow through on his grand pronouncements. “Make no mistake, Japan will emerge from economic contraction and advance into new fields and engage in fresh challenges,” Abe recently wrote in the Wall Street Journal. “There is no reason for alarm.”

Alarm bells should be ringing in Tokyo, however. Even if Abe gets the “third arrow” in the air, it could still miss its target. Many of the reforms Japan needs will take years to implement. Meanwhile, the other two arrows of Abenomics may already be running their course. There was opposition within the BOJ to its latest decision to boost QE — an indication that the bank can’t be counted upon to keep the printing presses rolling forever. Nor can Abe dodge the need to stabilize the government’s debt and deficits indefinitely. The government’s debt is 240% of the country’s GDP — the largest among major advanced economies. He’s right now weighing whether or not to hike the consumption tax yet again. Imposing it could deal another blow to growth; postponing it would undermine what little credibility Abe had as a fixer of the nation’s finances.

In the end, repairing Japan requires more political will than Abe has shown. Maybe a new election will help him find it. But don’t hold your breath.

TIME The Vatican

Pope Francis Warns G20 of Effect of ‘Unbridled Consumerism’

Pope attends His Weekly Audience St. Peter's Square
Pope Francis speaks during his weekly audience in St. Peter's square on November 12, 2014 in Vatican City, Vatican. During the event, the Pope asked the clergy to be humble, urging them to be understanding towards their communities and to avoid an authoritarian attitude. Franco Origlia—Getty Images

"Responsibility for the poor and the marginalized must therefore be an essential element of any political decision"

Pope Francis warned heads of states attending the annual G20 meeting in Australia about the effects of “unbridled consumerism” and called on them to take concrete steps to alleviate unemployment.

In a letter addressed to Australia Prime Minister Tony Abbott, who is chairing this year’s G20 Leaders’ Summit which begins Sunday, the Pontiff called for its participants to consider that “many lives are at stake.”

“It would indeed be regrettable if such discussions were to remain purely on the level of declarations of principle,” Pope Francis wrote in the letter.

Pope Francis, who has made a habit of addressing the leaders of the G20 meetings, has often raised his concerns with the global economy. Last year, in lengthy report airing the views of the Vatican, he criticized the “idolatry of money” and denounced the unfettered free market as the “new tyranny.”

In the letter published Tuesday, he said that, like attacks on human rights in the Middle East, abuses in the financial system are among the “forms of aggression that are less evident but equally real and serious.”

“Responsibility for the poor and the marginalized must therefore be an essential element of any political decision, whether on the national or the international level,” he wrote.

TIME Economy

U.S. Asks IMF to Write-Off Ebola-Hit Countries’ Debt

US Treasury Secretary Jacob Lew gives a joint press conferece with Egyptian finance minister Hany Dimian (unseen) at the Egyptian Ministry of Finance in Cairo on Oct. 27, 2014.
US Treasury Secretary Jacob Lew gives a joint press conferece with Egyptian finance minister Hany Dimian (unseen) at the Egyptian Ministry of Finance in Cairo on Oct. 27, 2014. Hassan Ammar—AFP/Getty Images

A debt cancellation twice as large was approved by the IMF for Haiti in 2010

The Feds proposed Tuesday that the International Monetary Fund (IMF) cancel roughly $100 million in debt owed by Liberia, Sierra Leone and Guinea, which have been hit hardest in the current Ebola outbreak.

Collectively, the three countries owe $372 million to the IMF. U.S. Treasury Secretary Jack Lew said in a statement to Reuters that eliminating $100 million of that would strengthen the nations’ economies as they struggle to recover from the devastating effects of the virus, which has killed thousands.

“The International Monetary Fund has already played a critical role as a first responder, providing economic support to countries hardest hit by Ebola,” Lew wrote. “Today we are asking the IMF to expand that support by providing debt relief for Sierra Leone, Liberia, and Guinea.”

Treasury officials said the $100 million may be drawn from the IMF’s natural disaster debt relief fund. The fund was first used to cancel Haiti’s outstanding $268 million of debt owed to the IMF after the 2010 Haitian earthquake, the IMF said.

Without significant intervention in the Ebola outbreak, West Africa could lose up to 4% of annual growth and $25.2 billion of GDP by 2015, according to the World Bank.

[Reuters]

TIME ebola

Ebola’s Other Toll: Food On the Table

People draw water in the West Point neighborhood, where many people have died from Ebola, in Monrovia, Liberia on Oct. 17, 2014.
People draw water in the West Point neighborhood, where many people have died from Ebola, in Monrovia, Liberia on Oct. 17, 2014. John Moore—Getty Images

Liberian families are feeling the pressures of food insecurity, and are eating less.

Eighty-five percent of households in Liberia are eating fewer meals a day as a way to deal with lower incomes and higher prices related to the Ebola epidemic, according to a new report from the global humanitarian agency Mercy Corps.

Most households are also reducing the amount they’re eating at each meal, and report supplementing with lower-quality and cheaper food. When asked in surveys about household priorities, Liberians listed food as their most urgent need even before health care and clothing. A variety of factors are playing into Liberian families’ inability to get food on the table, including restrictions on transportation and lack of quality products at local markets.

One of the major industries hit by the Ebola outbreak in the three countries affected by the outbreak is agriculture, which is a dominating industry in Liberia. Other Liberians lost incomes due to protocols put in place to contain the virus, like closing schools. Teachers employed by the government still receive salaries, but private school teachers do not.

Decrease in number of household income earners MercyCorps

About 63% of households also reported an increase in expenses since a state of emergency was declared in August. Liberians used to rely on cross-border trade with Guinea and Sierra Leone, but the epicenter of the outbreak was the very area around shared borders. Now, all imports have shifted to Monrovia, putting pressure on supply chains and prices. But vendors in local markets estimate a 52% reduction in their number of customers each day, since large gathering of people has been discouraged.

“If attention is not paid to the economic impact of the crisis, the situation will continue to deteriorate over the coming months,” the report reads.

Mercy Corps says it plans to help farmers by offering cash transfers, emergency food assistance, and aid in goods transport. Working with the local government to improve transportation conditions while maintaining tight Ebola protocols is another way to increase both incomes and food availability. However, bigger initiatives have to start now in order to ensure the current food crisis is temporary. For instance, the upcoming planting season needs to continue on schedule and there needs to be a greater assessment of the whole region’s transportation system.

If action isn’t taken soon, the impact on the country’s economy and food system after the outbreak could be devastating.

TIME India

Indian PM Narendra Modi Greatly Expands His Cabinet

India's President Mukherjee, PM Modi, new cabinet ministers Manohar Parrikar and Suresh Prabhu pose after a swearing-in ceremony in New Delhi
India's President Pranab Mukherjee, Prime Minister Narendra Modi, new cabinet ministers Manohar Parrikar and Suresh Prabhu pose after a swearing-in ceremony at the presidential palace in New Delhi November 9, 2014. Prakash Singh—Pool/Reuters

The dividing of the defense and finance portfolios, previously united in the person of Arun Jaitley, is the main change

Indian Prime Minister Narendra Modi moved to give fresh focus to the country’s economic growth on Sunday, with a cabinet reshuffle that added 21 new ministers to his government.

The major change came in the portfolios of finance and defense, both previously held by Arun Jaitley — a senior leader in Modi’s Bharatiya Janata Party (BJP). Modi’s original decision to place Jaitley at the helm of the two vital ministries had been slammed by critics and opponents, who said Jaitley wouldn’t be able to do justice to either.

Jaitley has now been relieved of the defense portfolio, enabling him to devote more time to the Finance Ministry and help fulfill Modi’s planned economic turnaround.

Former Goa chief minister Manohar Parrikar, a 58-year-old widower with a no-nonsense reputation, has been named India’s new defense minister.

The cabinet expansion now means Modi’s council of ministers numbers 65 instead of 44, according to Reuters.

During his election campaign, Modi laid an emphasis on a more streamlined decision-making machinery at the top in order to function more efficiently and effectively, in a strategy called “minimum government, maximum governance.” But some media point out that the new council of ministers is not that much smaller than that of the previous government.

Nevertheless, India’s business leaders by-and-large expressed their approval at the changes.

“The cabinet expansion sends out a strong signal that the government under Prime Minister Modi is serious about accelerating the reforms process,” said Ajay Shriram, president of the Confederation of Indian Industry.

MONEY Jobs

The U.S. Added 214,000 Jobs In October, Unemployment Down Slightly to 5.8%

commuters at rush hour
iStock

The results beat expectations, but didn't quite match September's employment growth.

The economy added 214,000 jobs in October, according to the Bureau of Labor Statistics, meeting expectations of continued healthy job growth.

Today’s nonfarm payroll report also showed the unemployment rate declining slightly to 5.8%, down almost a full percentage point since the beginning of the year. That’s the lowest level since 2008, but is still well above its pre-crisis low of 4.4%.

The labor force participation rate — the percentage of the workforce that is either employed or actively looking for work — remained around 62.8%, reflecting older Americans dropping out of the workforce roughly as fast as new workers enter.

Once again, increased employment did not significantly raise average hourly earnings, which increased by three cents since last month’s report and by just 2% since the beginning of the year. Despite relatively stagnant wage growth, economists are optimistic the economic recovery will soon be felt in workers’ wallets. “If unemployment continues to fall, wage growth should pick up,” says Mark Hamrick, Washington bureau chief for Bankrate. “It’s like waiting for a bus that hasn’t arrived yet.”

While today’s news is good, it doesn’t quite match up with September’s employment growt, when the economy added almost 250,000 jobs.

This week’s midterm elections, in which Republicans took over both houses of Congress, could have an effect on future employment growth, but any impact won’t be immediate. The G.O.P. has been critical of the Federal Reserve’s low interest rates, and may now be more vocal its opposition to loose monetary policy. Fed chair Janet Yellen, however, a vocal supporter of using low interest rates to help promote job growth, acknowledged the improving labor market after the latest Fed meeting but indicated that she and her fellow Fed economists remained concerned about sluggish wage growth, low inflation, and the tenuous housing market recovery.

 

TIME France

French President François Hollande May Not Stand for Re-Election

France President Hollande
French President François Hollande poses on a TV set prior to the start of a French channel TF1 broadcast show, in Aubervilliers, outside Paris, on Nov. 6, 2014 Martin Bureau—AP

He cites his failure to temper the nation's spiraling unemployment during his term in office

France’s President François Hollande said Thursday that he may not stand for re-election in 2017 if he fails to cut unemployment by the end of his term.

“If I cannot manage it by the end of my term in office, do you really think I would go before the French in 2017?” he said in a televised interview with French TV channel TF1.

Hollande admitted that it was a mistake to promise that he could bring down the rise in joblessness, which currently stands at 11%.

But the 60-year-old vowed to “go to the end” to reform France’s weak economy.

A poll released Thursday shows the Socialist Party leader has an approval rating of just 12%.

TIME Economy

Alcohol Is Getting More Expensive Most Quickly in These Cities

Anheuser-Busch InBev NV Products Ahead Of Earnings Data
Jeff Allen, a driver for Brewers Distributing Co., delivers Anheuser-Busch beer in Pekin, Illinois, U.S., on Thursday, Oct. 30, 2014. Bloomberg—Bloomberg via Getty Images

Bay Area booze is getting pricey

If the price of your pints seems steeper than it did a year ago, you might be on to something.

Depending on where you live, the price of alcoholic beverages was increasing faster than the rate of inflation heading into this fall season. This rate of increase is according to Consumer Price Index (CPI-U) data for all urban consumers released periodically by the U.S. Bureau of Labor Statistics.

This first chart shows how fast alcohol prices increased or decreased when it comes to alcoholic beverages alone:

Note that we are using only eight months of 2014 data in the above chart to compare against the 2013 yearly index average for each area.*

To better understand these numbers at scale, consider for a moment the all-items CPI-U basket, a weighted average of expenditures across all consumer goods and services. It’s the most common measure of inflation in the U.S. Throughout the year, the BLS publishes U.S. city average index values as well as more granular metropolitan index values. You’ll often hear about the inflation rate. Specifically, this number tells us how fast the index value for all the items in the CPI-U index is increasing for a given timeframe. As of August 2014, that number was averaging 1.65%, up from last year’s total average of 1.46%:

In nine of the 25 metro areas considered, the price of alcohol outpaced the ongoing 2014 rate of inflation. Naturally, these were areas in which the price of alcohol was increasing the fastest.

The fact that alcohol prices were increasing the fastest in the San Francisco Bay Area is not necessarily an indication that the Bay Area’s alcohol is the most expensive in the nation. Because a CPI measures how fast prices change in one area over time, it can’t be used to compare prices across cities. Increases or decreases, however, can be compared across geographic areas over time.

If you’re wondering about specific alcoholic beverages, it’s mostly beside the point. For those living in an area where the price of alcohol was increasing faster than inflation, drinks this weekend really might be a little more expensive.

*In FindTheBest’s CPI comparison topic, we use the yearly average of monthly index values. Using the yearly average smoothes out the potential volatility of year-over-year comparisons because it incorporates more data points. So measuring against the 2013 yearly index average for each area, the chart shows the percent change from that 2013 yearly index average to the end of August 2014. The August to-date average covers eight months of BLS data, though indexes for most metro areas are released on an odd/even basis or else a semiannual one.

This article was written for TIME by Ryan Chiles of FindTheBest. More from FindTheBest:

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TIME Economy

Where the Next Financial Crisis Will Come From

financial crisis
Mutlu Kurtbas—Getty Images

It won't be from the banking sector

The next financial crisis won’t come from the banking sector. That’s the message implicit in the latest report on the global financial sector from the Financial Stability Board, the group that monitors what’s happening with the world’s money flow. Instead, it’s very likely to come from the massive and growing “shadow banking” sector—an area mostly untouched by our government regulators.

New numbers show that the shadow banking industry—which includes everything from money market funds to real-estate trusts to hedge funds—grew by a whopping $5 trillion in 2013 to $75 trillion. If you look at the sector as a percentage of the global economy, that’s nearly what is was pre-crisis, back in 2007.

That means many of the risks that used to be held on bank balance sheets have moved to the non-regulated areas of finance. This says a number of important things. First and perhaps most importantly, all the backslapping in Washington about how much “safer” our banking system is now than it was six years ago is meaningless. While banks are still plenty risky, increasingly, new financial risk isn’t being held in banks — it’s being held in places that regulators can’t see it. (see my debate with Treasury over that fact here.) That Dodd-Frank financial regulation wasn’t able to do more about this is a real pity.

One of the ways that you can already see how the shadow-banking sector is influencing the financial markets is in margin debt. That’s a measure of the amount of debt that investors are using to buy stocks – and right now, New York Stock Exchange margin debt is at record highs; some think that’s because hedge funds have become such huge market players, in some cases as large or larger than banks in terms of their influence. Margin debt at record highs is scary for many reasons, one of which is that when there’s a lot of margin debt and the market turns, it speeds up a fall, leading to the kind of snowball effect that can lead to a market crash.

While that won’t necessarily happen any time soon, it’s worth remembering that debt itself is always the best predictor of financial crisis. As plenty of research shows, over the last two hundred years or so, every single financial crisis has been preceded by a big increase in debt levels. The growth in the shadow banking sector means we now know less, not more, than we did about who’s holding debt than before the financial crisis of 2008. That’s something we should all be worried about.

TIME Economy

The Strength of the U.S. Dollar Reflects Global Economic Reality

A man stands next to a money changer in Colombo
A man stands next to a money changer in Colombo, Sri Lanka, on Feb. 29, 2012 Dinuka Liyanawatte—Reuters

All hail the almighty greenback!

Ever since the Wall Street financial crisis of 2008, predictions of the dollar’s demise have come fast and furious. As the U.S. economy sank into recession, so too did confidence that the greenback could maintain its long-held position as the world’s No.1 currency. In Beijing, Moscow and elsewhere, policymakers railed against the dollar-dominated global financial system as detrimental to world economic stability and vowed to find a replacement. Central bankers in the emerging world complained that the primacy of the dollar allowed American economic policy to send shock waves through the global economy that roil their own markets and currencies.

But here we are, six years after the crisis, and the dollar is showing just how resilient it actually is. The dollar index, which measures the greenback’s value vs. a basket of other currencies, has reached a four-year high. Those policymakers who bitterly criticize the dollar show little actual interest in dumping it. The amount of U.S. Treasury securities held by China stands at a whopping $1.27 trillion.

The newfound strength of the dollar makes perfect sense. Sure, the world economic landscape is changing, with new rising powers like China and India, whose currencies may one day rival the U.S. dollar. But the buoyancy of the greenback is a reflection of today’s reality: the U.S. is the lone, significant bright spot among the world’s major economies. GDP in the third quarter grew an annualized 3.5% — far higher than other industrialized economies. That’s why the Federal Reserve has wrapped up its long-running and highly unorthodox economic-stimulus program known as quantitative easing, or QE, which, by spilling a torrent of dollars into global financial markets, was one factor behind the currency’s weakness in recent years.

Meanwhile, most of America’s key trading partners are heading in the opposite direction. The European Central Bank (ECB) is widely expected to start its own QE program to try to combat potential deflation and jolt sagging growth in the euro zone. That’s why the euro’s value against the dollar has been sinking to levels last seen two years ago. If the ECB does act, downward pressure on Europe’s common currency will likely intensify.

Meanwhile, in Japan, the central bank on Oct. 31 surprised markets by greatly broadening its own monetary-expansion program in an attempt to rescue Prime Minister Shinzo Abe’s stumbling initiatives to revive the long-slumbering Japanese economy, nicknamed Abenomics. The yen tumbled to a seven-year low against the dollar as a result. Research firm Capital Economics predicts that the Bank of Japan’s (BOJ) action will help push the Japanese currency all the way down to 120 yen to the dollar by the end of 2015, from about 112 today.

The dollar has been gaining against some emerging-market currencies as well. Faced with slowing growth and the strain of economic sanctions, Russia’s ruble has been hitting repeated all-time lows against the dollar. Not even an interest-rate hike by Russia’s central bank on Friday has been able to stem the slide. On top of that, though that pressure has eased, the currencies of India, Indonesia and many other emerging economies still have not recovered their strength from when they tanked last year, after the Fed first signaled it was scaling back its stimulus activities.

How long can the good times roll for the U.S. dollar? That depends on many factors, from the future growth of U.S. GDP to the health of the global economy and upcoming Fed decisions on interest rates. Yet with central-bank policy in the most advanced economies sharply diverging — the Fed tightening, the ECB and BOJ loosening — the dollar could see continued gains. Some economists believe the conditions are in place for an extended period of dollar strength, perhaps lasting several years. “The building blocks are still in place for a sustained dollar rally,” analysts at financial giant Barclays concluded in a recent report.

The fact remains, too, that no other currency has emerged to truly rival the dollar as the world’s No.1 choice. The uncertain stability of the euro was exposed by its multiyear sovereign-debt crisis and the chaotic response to it from Europe’s leaders. And even though Beijing has high hopes to transform the Chinese currency, the yuan, into an international powerhouse, policymakers there have been extremely slow to introduce the financial reforms that would make that a real possibility.

Of course, there are still long-term factors at play that could knock away the pillars of dollar dominance. Russia and China, for instance, recently pledged to settle more trade between the two nations in rubles and yuan. But for now, the dollar reigns supreme, as well it should.

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