The Buzz Around Abenomics


Shinzo Abe over the past couple of months has become the most prominent figure in global economics. He has received praise and criticism from all sides of the economic spectrum. Regardless of his international image, he has vigorously backed his “three-arrow” approach. This is the use of comprehensive monetary, fiscal, and structural policies to pull Japan out of its chronic deflation.

The base of the macroeconomic strategy is simple, but what is incredible is the turnaround seen in Japanese politics and the increase in domestic confidence. Before Abe it had seemed like the Japanese government and cooperating technocrats had called it a day in attempting to solve the countries chronic deflation, and suddenly Abe becomes prime minister and confidence is restored. Coupled with his three arrow approach he has used invigorating nationalism to spur the domestic market, and this may be the true long lasting effect of his spirited endorsement of his macroeconomic policy.

The use of such radical policy such as doubling the money supply has revitalised the economy in a manner that is difficult to quantify. It can be argued that purely the willingness of the government to pursue radical policy has restored confidence and boosted consumer and firm spending rather than the actual effect of the change in money supply. The Yen has already weakened from Y77 to a dollar to now bouncing around Y100 to a dollar. This has had a positive effect on exports and reinvigorating the market. The markets have recapitalised at around $1.5 trillion, the biggest rally in the past decade. Japan is beginning to boom, and it is this galvanisation that had driven market confidence which is proving to be the major factor in taking Japan out of deflation.

For years deflation had increased the real debt burden in the economy, and Japan has suffered. But through his stance and that of Haruhiko Kuroda (Bank of Japan’s Governor) they have increased the velocity of money and re-liquidated the market. But there is also the fiscal aspect; Abe has called for firms to increase wages while introducing straightforward tax breaks. This is simple expansionary fiscal policy in the form of maximising injection and limiting withdrawals. So far the short term effects are following through and it looks like the inflation target may be met, however the question stands on whether or not the economy will overheat and induce an inflationary burden.

Shinzo Abe can be identified as particularly patriotic and holds very strong nationalist sentiments, what he is tapping into is what was once the strength of a country that held an empire. Japan has also had continuing issues with its “favourite” neighbour China which has raised questions about security. There was also the tsunami which created a short term energy crisis, and had brought to the surface issues amongst Japans biggest firms. They felt that they could no longer operate with uncompetitive exports, and high corporation tax. This assimilates Abe to the Japanese term “Fukoku-kyohei” which means “rich country, strong army”. Deflation has proven to be the weakness in the economy, and the bane to Japanese industry, but now with this invigoration of fiscal and monetary policy the economy can move forward.

Japan already has the correct economic infrastructure in place, and is also notable for its well educated labour force, the sustainable increase in efficiency and productivity of workers, and suitable regulation. Joseph Stiglitz is a strong advocate of Abe’s approach; he notes that through continued structural investment and future investment into research and education that the growing confidence will be vindicated by reaching inflation and growth targets.

Japan has always been renowned for its commitment to research and development, as well as leading in structural investment. Now the government is backing it with vigorous policy, but there is still the question of what impact this will have as it failed to bring Japan out of deflation during the “lost decade”.

In the coming years it will be interesting to see if Abe can bring the economy to a state where all the strong elements of infrastructure, workforce, and the introduction of drastic monetary and fiscal policy all work cohesively to achieve the target of a once again sustainably booming Japanese economy, without giving up on its strict environmental and working standards and regulations.

As Stiglitz notes “Japan could become one of the few rays of light in an otherwise gloomy advance-country landscape”.

For more reading look at:

Financial Times:

Project Syndicate:–stiglitz


Monetary Transmission Mechanism

I am going to consider and evaluate the money transmission mechanism in regards to the use of a contractionary monetary policy. This will be in form of a hypothetical increase in the base interest rate set by a central bank, and the no change in money supply. This has a considerable effect on the value of currency, output of the economy, price level, and the factors that establish output.

The increase in the base rate of interest by a central bank does not directly affect the consumer, as it does not lend to individuals. However, the change in base rate does influence the interest rate at which retail banks will lend money, and may vary the cost of long term borrowing such as mortgages.

First there will be a direct effect on consumer spending as a result of the increase in the base rate, due to the influence on retail banks. In a sense the cost of borrowing money has increased, and therefore this will decrease demand for borrowing as people will not be able to afford it. This will considerable effect on households with mortgages, as the consumer will now have more of their income paying off the loan, thereby decreasing their disposable income. This does not only apply to mortgages but also those with short term loans, and even credit cards. The cost of money for the consumer has increased and this restricts their effective demand. In a large scale this would cause a contraction in aggregate demand, as consumer spending will decrease.

This monetary policy will also induce a fiscal effect. Higher interest rates would encourage people to save more of their money rather than to spend it. Fiscally this would be seen as a withdrawal which again would affect the level of aggregate demand. This would “cool-down” the economy and can be noted as part of a policy that would have both monetary and fiscal elements.

Furthermore, the manipulation of interest rates will have a direct consequence on the strength of the currency in regards to foreign exchange. The currency will strengthen as a result of increasing the interest rates, as money will enter the system for the purpose of saving at a lucrative interest rate. An example of this was seen in Australia where interest rates were high and as a result the currency continued to strengthen.

This has adverse effects on the balance of trade, as a result of a strong currency exports will decrease because domestic products are more expensive abroad, and imports will increase because foreign products are “cheaper”. Referring back to the example of Australia the government announced that it wanted to reduce the interest rate as the economy was becoming too dependent on imports and it also sought to increase exports.

In regards to aggregate demand, there would be a considerable contraction if this were to continue for a long period of time. As there is a decrease in consumer spending, and imports would exceed exports. However, the final factor could be seen in a decreasing level of firm investment.

The increase in interest rates will decrease a firm’s ability to borrow money, and so this will decrease the firms’ ability to invest in development, or research. This would mean that firm’s would not seek to increase production, or invest in new technologies to achieve greater productivity or efficiency. It could also possibly involve the freezing of employees wage rates.


However as a result of increasing national independence some of these effects may be magnified or reduced by the monetary policy of other countries. The most recent example is that of the United States and China as each is accusing the other of direct currency manipulation it order to ensure economic goals are met by possibly affecting other economies. It is possible that if one central bank in a major economic country such as Britain would raise the base rate, it might signal the European Central Bank to increase their base rate. There is to a degree a large scale of speculation, in regards to what international effect there may be. Australia is a rare example where government announcement was met with direct action as money began to flow out of savings and was reinvested into the stock markets in the U.S. and U.K. identified in the rise of the central indexes of the S&P 500, Dow Jones, and FTSE 100.

Previously mentioned was also the actions of firm, and the question must be raised to what degree would they decrease investment. There is still the entire complex of competition amongst firms, so as a result of this no firm within a given industry may reduce levels of spending as a there is a need to maintain competiveness and market share. It is also a different market in regards to loans for large corporations or small business, the increase in the cost of borrowing for a corporation or conglomerate  may be insignificant, but for a small business it may depend on cheap borrowing to maintain a the entrepreneurial plan for creating a new firm.

In regards to the use of credit cards and other types of short term loans, there may not be such a drastic decline in their use. In many cases consumers are dependent on the use of credit cards to maintain their lifestyle. This brings along the point that even though interest rates are higher so saving is more lucrative, there could be the case that people cannot afford to save. This takes into account the marginal propensity to save. This is the change in savings in regards to a change in income; the change in income would be a result of the increased cost of borrowing. So in a sense marginal propensity to save will decrease as individuals have less income and must use it so live.

The effect on individuals with mortgages may have a time delay, as a result of there being different types of mortgages. Those with variable rate mortgages would suffer immediately as now a greater portion of their income will be taken up with monthly payments, but those that have fixed rate mortgages for a given time period may benefit as their monthly payments have not changed. However, to analyse this it would be necessary to take into account how many people have fixed rate mortgages, and this would establish the aggregate effect on consumer spending.

Finally, there is also the factor of how quick the change in the base rate is. For example in Europe following the financial crisis the central bank quickly dropped the base rate, but in Japan during the 90s the change in the base rate was gradual. In Europe to avert full scale crisis dropping the base rate quickly had arguably aided in ensuring that demand was not completely wiped out as a result of crisis. Although, it is still questionable as times of crisis are unique situations as their causes and consequences differ. This is where there is a greater link between monetary policy and fiscal policy, and the most recent example of this can be seen in European austerity.

Currently in Europe the ECB’s base rate is at 0.5%, simply this means that the cost of borrowing is “cheap” and this falls in line with expansionary monetary policy aimed at achieving economic growth. However, at the same time there is a restriction on government spending and increased taxes to deal with debt, and this can be seen as a reduction in injection and an increase in withdrawals forming contractionary fiscal policy. This forms an obstruction in the money transmission mechanism in regards to trying to pursue growth, but keep inflation down, and reduce government debt.

The money transmission mechanism is a good example of the expected response in changes to monetary policy. However the current economic climate is a fine example of how it may not work as a result of other policies pursued. In the evaluation of the changes it could be noted that it is difficult to consider it on a whole market level as it has different effects for those on high or low incomes, and small or big businesses.

Monetary Policy Basics

Interest Rates:

The interest rate determines the rate of interest at which borrowers pay lenders.  This can be on a consumer level or a business level and may or may not involve the central banks or private banks. When the base interest rate is lowered by the central bank of a country, it can be noted that borrowing is in a sense cheaper. When the base interest rate is increased the cost of borrowing is seen to become more expensive.

Money Supply:

Money supply is the total amount of monetary assets within the economy during a given period of time.  It consists of bonds, investments, other financial instruments, as well as cash. Traditionally an increase in money supply sees the price level of an economy increase, as there is “more money, chasing the same amount of product”. Whereas maintaining a specific money supply or reducing it leads to the price level of an economy decreasing, as there is “less money, chasing the same amount of product” meaning that there is no longer effective demand.

Expansionary Monetary Policy:

This would be pursued in order to achieve increased economic activity in the pursuit of growth. One manner of pursuing expansionary policy is to increase the money supply, while lowering interest rates. This will increase the output of the economy, but consequently an inflationary response.

This would be noted as a shift in aggregate demand outwards as you are increasing factors such as consumer spending, and investing. However, this does not directly affect government spending and the balance of trade may not change.

Contractionary Monetary Policy:

This would be pursued in order to achieve a lower price level in the economy, and to induce a cool-off period for the economy. One manner of pursuing contractionary policy is to decrease or maintain money supply, while increasing interest rates. This will reduce the output of the economy, while reducing the price level. This can be noted as a deflationary response.

This would be noted as shift in aggregate demand inwards as you are reducing factors such as consumer spending, and investing as you are making it more difficult to obtain credit, and establish effective demand.

Monetary Policy:

The most popular type of monetary policy to pursue is currently inflation targeting, whether to induce inflation or reduce it. There are however other factors that come into play in regards to monetary policy, which increase its complexity and its possible results. There is the issue of the velocity of money throughout the economy, and this considers how and where the money is moved and what economic activity it actually participates in.

It was Irving Fisher in 1911 who had established the clear relationship between money supply, velocity of money, and inflation. This can be noted as MV=PQ where M represents money supply, V represents velocity of money; P represents the price level of the economy, and Q the total quantity of goods available.

There is also one key issue that is often debated in regards to monetary policy, and that is the role of the gold standard. Traditionally, the value of a currency had been derived from gold which held actual value and was in existence at any one point. The reset of a currency back to the gold standard has often been used to combat high levels of inflation or hyperinflation as it has a “real value”. However the use of the gold standard restricts our ability to create money in order to manipulate currency, and a common use of monetary policy today has been to decrease/increase the value of a currency to achieve economic goals such as increased exports.

It can be noted that keeping the gold standard is difficult as economies tend to grow faster than the supply of gold, and this results in deflation. This is shown in the case where money supply is reduced, as there is no longer the effective demand at current market prices. The gold standard does to a degree have transparency as it is difficult to manipulate, but it restricts economies when there is a need for higher debt in order to fund war efforts, or revive the economy.

Mobile Phone Providers


It has come to that time again; I must renew the contract for my mobile phone. I have recently suffered at the hands of some frustrating customer service by O2, but there is not substantial enough incentive to change provider.

I had a browse around the different providers and packages available, whether it was to keep my current phone or to switch to a new phone and contract. What I soon came to realise that even though no provider would admit it there was to a degree extreme inter-dependence with the pricing and packages available. The only factors that could persuade me were additional benefits (such as O2 with priority tickets), advertising, or offering a marginally lower one off payment for the actual phone.

I was looking to change my phone to the current iPhone 5 and for a contract with at least 1 gigabyte of data, alongside unlimited calls and texts. For example (24 month contracts):



The Cost (Per Month): £37
Phone Price: £49
Package: Unlimited Minutes & Texts, and 1GB Data
Total Cost: £937



The Cost (Per Month): £42
Phone Price: Free
Package: Unlimited Minutes & Texts, and 1GB Data
Total Cost: £1,008



The Cost (Per Month): £41
Phone Price: £30
Package: Unlimited Minutes & Texts, and 1GB Data
Total Cost: £1,014



The Cost (Per Month): £34
Phone Price: £49
Package: 500 Minutes, 5000 Texts, and Unlimited Data
Total Cost: £865

Now it is evident that each package is different in its own way, and but it really comes down to the preference of the consumer, whether they want to pay a large monthly bill, or have little or no one payment for the device. Currently, it can be noted that this market is a great example of oligopoly.

It is clearly difficult for the consumer to decide which package offers the best all-around service, and the advantage EE have with 4G service is only temporary as the other providers are going to catch up. These are currently the four biggest firms, with other small firms still operating offering alternatives such as Tesco mobile, and the inter-dependency defines the oligopolistic nature.

The firms don’t heavily compete on price, but tend to increase advertising campaigns, or offer a range of benefits. O2 offers customer’s priority tickets to music and sport events alongside general offers from brands and food stores. Vodafone also creates offers from high street brands, and food stores, but also has the best roaming packages. EE has their current 4G network coverage, and most diverse coverage as a result of connection with T-Mobile and Orange. Three is the only to offer unlimited data in their packages, but then restricts minutes and texts and questionable coverage abroad.

Although I do not feel customer loyalty towards O2, I feel like it is more convenient to stay with O2 so keeping my number won’t be a difficulty, and I have already become accustomed to their online services. One factor which I have not yet covered though is the surcharges as a result of exceeding the data limit, currently it can be noted that the mobile providers are making the most profit out of data services as a result of the popularity of smart phones.

There is also the age long issue of small print. Currently providers seem to subsidise the cost of smartphones to an extent that it makes it attractive to switch to a new one every year. What consumers most often don’t realise is that there are various service charges, and unbelievable surcharge rates. It can be increasingly frustrating as you are told rather clearly the monthly bill and the upfront cost but they fail to directly mention the actual long term operating cost.

The industry in itself can be seen as a huge bundle of inter-dependence which in no way is really benefitting the consumers, the firms don’t want to compete on price, so they try to persuade with consumer benefits and advertising. O2 (under Telefonica) and Vodafone are an example of two aggressive advertisers and they currently fight for market share in the UK, this can be seen as a classic example of game theory where they have reached the Nash equilibrium where they both advertise.

This market is particularly frustrating as it seems that with your choices that you are in a scenario where you pick the lesser of two evils, rather than one standing out as the clear best choice. I can complain but the situation in the United States seems to be far worse, there is the situation where a consumer looking for the best coverage for a smartphone is forced into a duopoly between Verizon and AT&T. They not only have high initial payments for the devices, but then continue to have confusing plans which are separate for data and calls. The packages fail to offer a middle ground for consumers, meaning that if there are certain requirements such as more data the consumer jumps to a higher price level.

For now it looks like I will stick with O2 and an iPhone as after searching through different phones and different plans, nothing seems to incentivise me to move away. I already know how to deal and put up with customer services, although I wish that paper billing was not a part of the past, as it was great to see a breakdown of calls, texts, and data usage.