Returning The Reserves: Why Japan Must Focus On Consumption Not Investment

February 11, 2013Japanby Marc Chandler

Returning The Reserves: Why Japan Must Focus On Consumption Not Investment

Despite recent rhetoric by Japanese Prime Minister Shinzo Abe, the Japanese economy remains in dire straits – with ‘Abenomics’ simply the past LDP neo-Keynesian policies on steroids. The time is right for Japan to redistribute its reserves back to its people. Not utilizing the reserves now is like not opening the umbrella in your hand when you are in a downpour.

The Abe government is lucky.  The previous government wasted the little political capital it had on pushing through the controversial retail sales tax hike that won't be even implemented until 2014 at the earliest. 

The LDP ran its campaign as the some of the safe haven investor behavior was unwound.  At the same time, the weakness in the euro area economy and the spat with China (as the DPJ tried to maneuver around the fait accompli delivered by the nationalistic governor of Tokyo) weighed on Japan's exports. Nearly every one attributes the yen's decline to the rhetoric of Abe and other senior officials.  This serves to bolster Abe's image as a decisively and effective prime minister. 

Abenomics is simply the past LDP neo-Keynesian policies on steroids. Monetary policy is to become significantly more accommodative.   Fiscal policy will become more stimulative.  There is not much discussion of much needed structural reform or a bold vision of Japan's in the 21st century. 

Related: The Return Of Abenomics: A New, Old Hope For Japan’s Economy?

Related: Japan Could Lose Developed Nation Status by 2050

If there is a new tactic, it may be trial balloons of buying foreign bonds.  Yet, this seems to be a non-starter.  It is too close to intervention and would incur the wrath of its main trading partners.  Although it would be a positive carry for Japan, it is not clear that it would succeed in driving the yen lower.  Buying foreign bonds its reserves, which are already too large at nearly $1.2 trillion.

Returning The Reserves

Indeed, quite the opposite should be considered.  Nearly five years ago, the Financial Times published an op-ed piece of mine that proposed the Japanese government redistribute a quarter of its reserves to the Japanese people (here is where I posted it).  The essence of the argument has not changed.  The focus should be on consumption not investment.  The return on private investment remains lows, suggests too much rather than too little.  The public works, which the Abe government, like earlier LDP governments, is emphasizing reinforces the rent-seeking sector over the profit-seeking sector and is prone to corruption and waste.  

Two elements have changed and they make the proposal even more stimulative.  First, reserves are more than 20 percent higher, which means the distribution could be larger, Second, the propensity to consumer has, according to the Ministry of Internal Affairs an Communication has risen a by nearly 1 percentage point to 73.4 percent.  This means a greater amount of the distribution would be spent rather than saved.  It could boost the world's third largest economy by 2-3 percent. 

I had the opportunity to discuss the issue with senior BOJ officials.  Though they were interested, they expressed two reservations.  The first is that it would be the Ministry of Finance decision not the central bank's.   This is not an insurmountable obstacle.  Over the past couple of years the Ministry of Finance has been more creative in its use of reserves.  For example, it has offered a facility to help businesses make direct investment abroad. 

The other objection is that the reserves are not like US, BOE or ECB reserves that are owned outright.  Japan's reserves, like China's have been largely purchased by the issuance of short-term bills.  This means that reserves are mostly associated with a liability.  The return of the reserves, then, would leave an uncovered liability. 

Related: The World’s Largest Foreign Exchange Reserves

Related: The Missing Link in Japan’s Lost Decades

This too does not seem insurmountable, if the political will is there and, perhaps, with the Abe government seemingly more pro-growth than the DPJ governments, it is worth discussing again.  Moreover, stimulus impact would increase different tax revenues and reduce counter-cyclical spending (a record number of Japanese households receive government transfer payments) and help pay for the new debt.


The accumulation of reserves is meant to cushion the country in case of adverse circumstances.  Japan remains in dire straits.  Not utilizing the reserves now is like not opening the umbrella in your hand when you are in a down pour.

By Marc Chandler

Marc Chandler is the current Global Head of Currency Strategy at Brown Brothers Harriman in October 2005. Previously he was the chief currency strategist for HSBC Bank USA and BNY Mellon. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. In 2009 Chandler was named a Business Visionary by Forbes.

Still Raining in Japan is republished with permission from Marc to Market.

Get more special features in your inbox: Subscribe to our newsletter for alerts and daily updates.

Do you have a strong opinion on this article or on the economy? We want to hear from you! Tell us what you think by commenting below, or contribute your own op-ed piece at [email protected]

blog comments powered by Disqus