For years in America an argument has been made that the US Federal Reserve has unsuccessfully tried to fill a fiscal stimulus-shaped hole with monetary policy.
In Asia, notably in China and Japan, the deficit that monetary policy is trying and failing to bridge is demographic: a people-shaped hole.
This was amply illustrated in China when the Communist Party announced last week it would scrap its longstanding one-child policy just days after the mainland’s central bank moved to cut interest rates for the sixth time in less than a year.
One phenomenon is linked to the other: mainland China’s economic slowdown, against which the People’s Bank of China is fighting, is in part the result of the drying up of its formerly huge pool of underutilized labour. That, as Beijing is well aware, calls into question the mainland’s long-standing economic model based on investment and exports, and argues for making the difficult transition to one centred on domestic consumption.
Japan is little different, just a lot further down the track of shrinking population.
In both instances, as arguably it has been in the United States, monetary policy and the manipulation of financial markets are being asked to do the economic heavy lifting quickly.
Monetary policy, as the Fed, still unable to raise interest rates off the zero lower bound after seven years has found, is better at driving prices on traders’ screens than activity or inflation, much less, in the Asian context, the making of babies or welcoming of immigrants.
What monetary policy can do is act quickly, and often with less political difficulty than longer-term policy solutions.
Beijing, of course, faces no political hurdles to exerting its will internally. The mainland’s new two-child policy comes as the working-age population shrinks and it faces a future including declining overall population from about 2030, placing an increasing burden on those of working age.
From an economic standpoint, there are two problems with Beijing’s policy change: it won’t work and even if it did, help would arrive too late.
In the absence of massive subsidies, Chinese parents are likely, by and large, to decline to have a second child. Their reasons are economic, just as were their grandparents’, who generally lived in the country and saw large families as a route to old-age support. But Chinese today, like their peers in Mexico, Japan, South Korea and elsewhere, prefer to concentrate limited resources on fewer children.
For now, mainland China faces a slowdown which threatens to take its economic growth rate far below this year’s official 7 per cent target, a figure officials are in the process of back-pedalling from. Economists at Fathom Consulting in London estimate that actual growth has more than halved since the beginning of last year, from more than 6 per cent to less than 3 per cent.
The upshot: more easing.
“We see further substantial cuts in China’s policy rates of interest over the next year, not least because in real terms they remain stubbornly high,” Fathom wrote in a note to clients.
Abenomics, the suite of policies pursued by Japanese Prime Minister Shinzo Abe, is also an effort which has demographic difficulties as its usually unstated subtext. The plan is a combination of all-out quantitative easing to try to stimulate growth and inflation, fiscal stimulus and structural reform.
Despite allocating hundreds of billions of US dollars in direct government spending, and the Bank of Japan buying up assets equal to almost 70 per cent of annual output, the programme has yet to meet its fundamental goals of prompting self-sustaining growth and inflation.
The Bank of Japan last week held interest rates and its asset-buying plan where they were, despite saying that the outlook was worsening. Growth contracted in the second quarter and may well still be shrinking, taking Japan into the second recession of Abe’s three-year tenure.
The central bank pushed back yet again its goal for achieving 2 per cent inflation, which it now says won’t happen until the second half of fiscal 2016.
The Bank of Japan appears to have lost its nerve, unsurprising given the very mixed record its and Abe’s policies have demonstrated.
As in China, Japan has plans to try to increase fertility, but help will arrive far in the future.
Abe said in September his plan, supported by only sketchy details, was to raise the birth rate from 1.4 to 1.8 children per woman, stabilising Japan’s population at 100 million in 50 years, down from 127 million today. He also hopes to bring more women into the workforce, which would help by increasing the working population. On immigration, the obvious answer, Abe has remained silent or negative.
If China looks to Japan as an example it will find that a people-shaped hole is very hard to fill with monetary policy.