News Analysis: New policy response urgently needed as Japan faces economic headwinds: leading economist

As the bank of Japan (BOJ) this week downgraded its view of the economy here with inflation still largely flat despite massive easing measures and with questions being asked of the efficacy of the government's structural reform policies, globally-renown economist Nouriel Roubini warned Monday that the world's third-largest economy would continue to face headwinds.

Roubini, 57, co-founder, chairman and chief economist of Roubini Global Economics, an independent, global macroeconomic research firm, told a press gathering that while Japan itself was not at the center of concern in terms of the global economic slowdown, its economic policy decisions have had a "ripple effect" and may well have impacted net income margins and, as such, have been "counterproductive."

"Japan is not at the center of global concern as such, but certain policy decisions including the BOJ adopting a negative interest rate recently have had a ripple effect following similar moves in Europe, with banks there also going negative," Roubini, also a professor of economics at New York University's Stern School of Business, explained.

"The notion of a negative interest rate started to have bad connotations and in Europe has killed banks' net income margins, which is ineffective and could be counterproductive," the Istanbul-born American said at the Foreign Correspondents' Club of Japan (FCCJ), although added that the use of minus interest rates by central banks "shouldn't be entirely ruled out."

He went on to explain that there is an argument for such monetary policy if the right economic consequences are considered, but said that in his opinion the announcement in Japan was "botched" and as such indirectly, Japan has thus become part of a broader global problem and not a solution.

Roubini said that both developed and emerging economies were facing significant headwinds, but opined that while broadly speaking structural reforms to increase potential growth are not occurring, particularly in emerging economies, and oil prices are continuing to chart a downward trajectory, coupled with a potential collapse of the European Union, and possibility of escalation of geopolitical tensions in eastern Europe, western Asia, and the ongoing refugee crisis, central banks flooding the markets with money to stabilize volatility is leading to banks' future policy ammunition running out.

"There is a marginal economic slowdown and whether or not the market continues to stay risk off is based on policy reactions," said Roubini.

"Central banks are running out of bullets and new rhetoric is becoming less effective as are new financial instruments including QE and QQE. Policy responses can be counter productive and hence downside risks could occur again and this risk is rising," said the economist.

As for Japan specifically, the expert proffered that as the likelihood of entering a further recessionary phase looks highly likely, the government may be advised to not botch its plans or announcement of its planned tax hike in 2017 from 8 percent to 10 percent, or the delay thereof -- an issue currently being mulled by Prime Minister Shinzo Abe and his finance ministry.

"Inflation is low and based on recent figures and economic indicators including GDP data showing a contraction in the last quarter, the risk of Japan entering another technical recession if the economy contracts this quarter is 50:50 if not more," Roubini said, adding that the monetary versus fiscal policy debate and the timing of the tax hike decision need to be accelerated.

"Some say 'let's wait until the end of the year and then decide about the tax hike,' but this is a bad idea because the economy is now weak and the outlook is weaker," he said.

"The BOJ has downgraded its view of the economy and the last tax hike saw consumption take a beating. Part of the consumption weakness is that people are saving their money because of the (impending) reduction of income after the next sales tax hike," said Roubini.

He added that while investments may be solid, consumption, which accounts for 60 percent of Japan's GDP, is weak and wage increases, as evidenced by recent statistics, are not going to be any better than last year, meaning there will be no further increase in households' disposable incomes looking ahead.

Therefore "it's better to announce a postponement of the tax hike to let consumers know" ahead of time and avoid a "self fulfilling prophecy" that will see consumers tighten their purse strings ahead of increasing costs and falling incomes, meaning that consumption will continue to be pressured from now, through 2017 and beyond, which will ensure inflation stays low and recession ever looming.

Roubini suggested that the government here and the BOJ need to urgently implement a new blend of policy responses to mitigate this scenario, which include monetary easing to loosen financial conditions; circuit breakers, including credit easing, to restore market confidence; and fiscal easing and structural reforms to support current, future and potential growth.

"The BOJ can unroll more easing measures, but a properly managed negative rate could create more lending in the real economy and a combination of three policies is ideal, as there are drawbacks of choosing just one," said Roubini, who added he believed, in contrast to economists here who speculated further easing in summer, that additional monetary accommodation policy will likely be introduced by the BOJ here in spring.

Roubini Global Economics has downgraded its growth and inflation outlook for Japan, according to an official statement on the matter, and believes that the prime minister's economic policy mix dubbed "Abenomics" is "not gaining traction," while the recent rise of the yen has led to a "tightening of financial conditions" with the nation possibly facing another "debilitating feedback loop."

Roubini, who was raised in Italy, has extensive policy experience and is a decorated academic, who served as the senior economist for international affairs on the White House Council of Economic Advisers and then the senior adviser to the undersecretary for international affairs at the U.S. Treasury Department between 1998 and 2000.

Among other issues, Roubini, also an extensively published author and media commentator, is credited as one of the key economic minds behind resolving the Asian and global financial crises. Enditem