 Okay, welcome back to the afternoon session, even under the horrible weather, which is no different from Tokyo under Typhoon yesterday, so thank you for coming back. And I'm Ipe Fujiwara, professor of macroeconomics at the Australian National University and the KO University. And we have truly distinguished speakers for this economic session. Professor David Bynes from the University of Oxford and Mr. Hideo Hayakawa, Senior Executive Fellow of the Fujitsu Research Institute, former Chief Economist and Executive Director of the Bank of Japan. Professor Bynes graduated from University of Melbourne with bachelor degree and obtained a PhD in economics at the Cambridge University. He's currently professor of economics and a fellow of Baylor College at the University of Oxford and is also adjunct professor of economics at the Australian National University. He has so many affiliation, I think, I hope, right. And he has numerous publications in macroeconomics in many leading academic journals and also very globally well-known academic economics as our next part of the macroeconomic policies. So we are fortunate to have David Bynes as a speaker. And another speaker is Mr. Hayakawa. So Mr. Hayakawa is, without any hesitation, Mr. Japanese economy. He knows Japanese economy more than anyone else. So Mr. Hayakawa spent most of his career at the Bank of Japan at the research and the statistics department. I don't know the exact number. I believe that it is about the 20 consecutive years at the research. Is it right? I think it's about the 20 years. So he's a bit like Alex Ferguson of the research function at the Bank of Japan. I'm sorry for those who don't know Alex Ferguson, but he's kind of the person who managed the Manchester United for a long time. Anyway, so he's a really, really iconic person for the Bank of Japan macroeconomic researches. And Mr. Hayakawa offers and will offer his view on the Japanese economy through not only conjectural assessment and the projection, but also academic perspectives. So we all have learned quite a lot under his directacy but the research function of the Bank of Japan. As a result, the considerable number of macroeconomists in academics as well as investment banks in Japan who are the graduate of so-called Hayaka School. So lots of macroeconomists have learned under Mr. Hayakawa. And personally, this economic session is a bit special to me. I learned the macroeconomics from these two distinguished speakers. I learned the dynamic macroeconomics and optimization from Professor Vines when I was a graduate student at Oxford. Then after the completion of my degree, I was assigned a job at the research and the statistics department of the Bank of Japan under the directacy by Mr. Hayakawa. So I cannot thank two distinguished speakers for what I have learned. But at the same time, this means at the same time, if I say something silly or stupid about the economists, it's not my fault, it's their fault because I learned the macroeconomists from them. So without further ado, we would like to have a first presentation. Please join me welcoming Mr. Hayakawa. Thank you very much, Ipe, for kind introduction. Maybe your oba saw me, but anyway. I'm going to start talking about the outlook for the Japanese economy with some emphasis on abenomics, QQE, and NOG. Okay, thanks a lot. Well, at the first slide, I explained what are the three arrows of abenomics and what is QQE. But I don't want to spend time here. I assume you already know them. But next several slides, we are going to check what actually happened after the introduction of abenomics as well as QQE. Well, financial markets, asset prices, QQE affected asset prices dramatically. Higher stock prices as well as a cheaper yen. Well, we see some reversal since the beginning of this year or last year. But, you know, say, as of November 2012, a month prior to Mr. Abe to office, a Nike was around 8,000 and the end of the rate was 80. Therefore, even now, stock prices are much higher and the yen is much weaker. The second is what about the prices? The trend of CPI inflation rate has turned positive since the middle of 2013. Right now, year-on-year CPI was about minus 0.5%, but it is largely affected by the huge decline in crude oil price. So if you exclude the effect of energy, the CPI still remain positive so that Japanese economy is not in deflation anymore. But you already know that Governor Kuroda declared that Bank of Japan will reach 2%, achieve 2% inflation target in two years, but it's already three and a half years since that introduction of the QQE, 2% target looks too far away. But even more disappointing is actually gross. We don't see any acceleration of gross during the past three and a half years. Actually, the average real gross rate under administration was about 0.7%, 0.8%. One source of surprise was the exports. Exports remain, this orange line depicted a real export, which remain almost flat even with substantial depreciation of the yen. But one important aspect in Japanese right now is that unemployment rate has come down to 3.0%. And if you look at the job offers to job applicants ratio, this yellow line is now 1.37% as of last July. It's almost comparable to the Japan bubble period. So that labor shortage right now is pretty severe. But as I mentioned, there's no visible acceleration of gross in the past three years so that this is largely due to the decrease in labor force, reflecting very rapid aging of population. But demographic is naturally well predicted so that there's no surprise for the demography. But unfortunate thing is not only labor force decline, but also productivity growth, productivity growth slowing so that a couple of years decrease, couple of decrease in labor force growth and also slowing down productivity naturally lead to very lower potential rate of growth. Japan's potential rate of growth seems lower than 0.5% now. It's actually 0.2% according to Bank of Japan estimate. This is the potential growth very estimated by Bank of Japan. Also 0.3% according to Cabinet of Estimates. So anyway, it's 0.2 or 0.3. Even worse is that Japan's potential growth is not only low, but declining. According to the Cabinet Office, Japan's growth rate was 0.8% when Mr. Abe took office. So it's come down from 0.8 to 0.3, but anyway. So that was what happened after the three and a half years of QQE, and then we are going to more closely look at what is really going on right now in Japanese economy. First, as respect to the household, consumer spending remain lackluster, but it's not by no means surprising. This is a personal consumption development, but it's not surprising. In the sense that, no real wage increase is better than that, but the depreciation of the yen naturally push up prices and also government increased consumption tax in the fiscal 2014. So that real wages actually squeeze. So this pink bars indicate year-on-year changes in the real wages. Real wages decline pretty sharply during the latter half of 2013 to the first half of 2015. So no reason to surprise that consumption remain lackluster. But the good news is that, well, actually real wage turned positive in the past couple quarters or so. It's very much thanks to the cheaper crude oil price, inflation that come down, real wage go up. So I'm not actually very much worrying about the personal consumption. I'm not sure, it's rolling going net. But that kind of surprises more sort of on corporate sector. Corporate earnings improved sort of historical high in the during the close 2015. This is corporate earnings, which the peak recorded in 2015 is much higher that the peak recorded pre-crisis period. Well, but as I mentioned, wage increase is very modest. And also this red line depict the business investment. This investment certainly rising, but if you compare the pre-crisis peak than kind of a low business investment pretty slow, low. So maybe you know administration, our businessmen to increase investment as well as wages. That's not very orthodox economic policy, but well, it's not surprising if you look at this sort of chart. Okay, one thing I would like to emphasize is that wage development. Well, actually, as mentioned, the wage increase is very modest, but if you look at the hour you pay for part-time workers, this red line, it's actually increasing almost 2% year on year. This is simply reflecting the tightening labor market conditions. But this blue line, it's actually wage for regular workers. This is very modest. Kind of surprising thing is that this is not just because companies are reluctant to accept higher wages, but labor union policy referring from asking wage increase. That's why wage increase is so modest. Next, look at the kind of forecast. The Japanese company will likely continue very moderate economic growth during fiscal 2016 as well as fiscal 2017. Even with delaying tax hike, tax hike delayed from October 15th to, sorry, April 15th to October 17th, and government make a pretty large fiscal package. Private consensus for growth remains less than 1%, kind of 0.7%, 4.5%, 0.9%, but remember, 0.7% to 1% growth is substantially higher than the Japan's potential growth, 0.2%, 0.3%. That means that labor market conditions likely tighten further, even this 0.7, 0.9, sort of growths. What about inflation? Core CPI inflation rate currently less than zero. We'll likely pick up as a negative contribution of energy price will decrease. We expect CPI inflation rate will likely turn positive as in the end of this year or beginning of next year. Anyway, going back positive. But given very modest increase in wages, average core CPI inflation rate in fiscal 2017 will likely exceed 1%, much lower than 2% target. Well, actually, Bank of Japan focused at CPI inflation rate in fiscal 2017 should be 1.7, and they still said that it may achieve 2% during the course of fiscal 2017, but a few people outside Bank of Japan believed that scenario. The private consensus for the inflation next year is 0.7%. Okay, then policy aspect. Well, everybody should know that Bank of Japan introduced negative interest rate as of January. Before that, a market participant perceived Q2E was approaching the limit. Bank of Japan already ate up nearly 40% of long-term JGB and selling. Then continue purchasing 10 trillion JGB each month was by no means sustainable. It's impossible logically. And also the analysis paper predicted that Q2E would face the limit during 2017 to 2018. Faced with a sharp appreciation of the yen and decline in stock prices in the beginning of this year, Bank of Japan decided to introduce a negative interest rate or noob. This is at least more sustainable policy scheme than Q2E, but unfortunately, think that the appreciation of the yen as well as the decline in stock prices accelerated further after the introduction of noob. But I said this is not due to the noob, but it's just a reflection of global turbulence of financial markets against the background of China risk so forth. A noob pushed down the entire EU curve thereby leading to a negative interest rate on 10-year bond. Bank of Japan predicted that this will have positive impact on real economy. But by now, no visible acceleration of growth is seen except for housing investment. Also surprising strategy of Mr. Kuroda backfired this time significant. The second introduction of noob actually get deterioration of consumer sentiment, especially among elderly. Also financial institutions that strongly shows strong resistance against noob. Noob certainly reduces the profitability of financial institutions. So if low profitability reduces the risk taking on the part of financial institutions, it may negatively work against real economy. Well, Bank of Japan can certainly widen negative interest rate, but the room for maneuver may not be so large. The limit of negative interest rate stem from the existence of cash. If the retail deposit rate becomes negative, you can withdraw cash from your account. And how much you withdraw depends on the safety and the cost of using cash. In this respect, while Japan is certainly a pretty safe country, so Japan still has very strong custom to use cash. It's pretty hard to pay, use say $100 note in supermarket in U.S. But if you pay 100,000 yen in cash in the restaurants or bars, it's easily accepted. So that in case of Japan, it's very tough to widen negative interest rate to say 1%, 2%. I've never been to the northern Europe. I heard that the limitation to use cash is very severe, much severe than the U.S., so that northern Europe can widen negative interest rate to near 1%. It's probably very difficult for Japan. So with these limitation of both QQE and NERP in mind, a bank of Japan has said that it will conduct a comprehensive assessment of QQE and NERP as of the coming September monetary policy meeting that's today. Nothing happened yet. Yeah, but at this point I have no news on that. Maybe it's very likely that some announcement will be made during our session. If I find some outcome, I'm gonna explain to some. Okay, finally this. Oh my God. Well, right now bank, as I mentioned, Japan has increasing monetary base by means of massive purchase of JGB. Long-term interest rate to remain extremely low because of bank of Japan purchase coupled with NERP. But what happens if a bank of Japan stop buying JGB after achieving 2% inflation target? That's very much depends on market perception on the sustainability of Japanese government budget. In this respect, as you know, Japan's public debt to nominal GDP ratio exceeds 200% or 240%, I guess. It's much higher than that of Greece. Greece is at 180%. And other administration commit to achieve positive primary budget balance in 2020. But assumption behind that is incredibly optimistic. The assumption for this is that it's close to 4% nominal gross and higher than 2% real gross. As I mentioned, Japan's potential gross is 0.2%, 0.3%. And in fact, if you look at, if you closely look at behind the figures, you find that the potential gross rate is assumed to jump up to higher than 2% in a couple of years from now. So this is actually shows that behind the scene, Japan is going with not that bad for employment. Low gross, but still higher than, higher than potential gross. So that's not really a very bad situation. Inflation is substantially lower than 2% target. But anyway, it's town positive. That's certainly good news. But well, behind the scene, we have a very large risk. That's the current situation of a Japanese going. I'm going to end on my presentation here. Thank you. Okay, thank you very much. As Mr. Hayakawa said, the Bank of Japan may release the evaluation of the policy. Then we may be able to have a live coverage and a live evaluation by two distinguished speakers. So the second speaker is Professor Vines. Let me just say while this is fixed that I'm surprised to find myself here. I don't know very much about the Japanese economy. That's why I'm surprised to find myself here. I've done, thank you very much, quite a lot of work on the world economy and Europe and the US and Australia and the recovery from the global crisis. And I've always wondered about the Japanese position. Is that right? Yep, good. And so what do you do when you find yourself in an unusual position? You ring up your friends. Well, my closest friend doing macroeconomics of this work happens to be on holiday in the South of France and that makes for quite an expensive call on my slightly crazy mobile phone contract. Nevertheless, it was a very valuable call. Then I spoke with Jenny Corbett, who you all know is a great expert on the Japanese economy and she recommended me to a report to me which I'm going to make use of and which I'd like to tell you all about now by John Plender. It's called Japan's Sustainability and Financial Stability and it's to be found on the official monetary and financial institutions forum website, a gathering of think tanks and central bank officials. And it's a very valuable piece. It just went up, I think, a day or so ago and I'm told by Jenny just as I came into this lecture that I'm now able to refer to it. Fourthly, I was very much helped by seeing Mr. Hayakawa's slides and he's given me permission to use one or two of them to show some facts about the Japan in my talk. And finally, I found something very helpful in the economist two months ago which I'm going to refer to at the very end. Now, why did I say all that to you? It's because to explain that because I'm an outsider, I thought it useful to try and go right back to the beginning and try and understand how we got here. You quite properly, Mr. Hayakawa didn't do this but spoke about the needs of the minute. I'm going to try and understand the needs of the minute in relation to how we got here. How we got here is two and a half decades of what's been known as a balance sheet recession with huge structural imbalances and adverse demographics, demographic trends. You could even follow this on my computer which if you'd like. That was the noise. You can go back to the beginning and there you are. Keep going backwards. Now you've lost the page. After some initial successes, the program has stalled and Mr. Hayakawa and I are going to talk about why that has happened and it is important for the world that we understand where Japan is and what the likely success is. Now the three arrows which you've heard about, let me remind you, aggressive monetary policy, flexible fiscal policy and structural reform were designed to combat these sustained problems. Remember the problems being balance sheet recession, huge structural imbalances and underlying a problem which you can't easily counteract although I'll talk about this, the demographic trends. In my talk, I'm going to discuss why the three arrows haven't fitted together. To take Professor Curtis's remark, I only understood this morning the significance of this three arrows metaphor but I would put it in saying that because one of the arrows has been broken, the other two arrows didn't work and that's a slightly different story if you stick all the arrows together, somehow they'll help each other not to break and it's that way round that we need to think about what's happened and why it's been difficult. But secondly, I'm going to talk at the end of my talk about how this is a global problem and your talk was almost entirely a domestic talk, very understandably. My conjecture, which I'll leave you with at the end is if you've been trying to do abonomics 15 years ago, it would have been much easier and quite possibly a very rapid route to enthusiastic victory and it's the trying of this strategy at this moment that has proved to be so difficult, you'll see why. There we are, where did we get here? Origin in the boom in asset prices and the subsequent bust. And very similar to the general idea of the subprime crisis in the US boom in asset prices in US housing, very leveraged financial institutions connected to that boom and crash. And the fall noted on this slide just how much the fall was really a staggering amount as Ku has said, equivalent to three times the loss of wealth in relation to GDP that the US incurred during the Great Depression of the 30s. It's a huge crash and that crash led to a banking crisis and there are the numbers that again I've picked up from outside, nationalization of seven banks, 61 institutions closed and 28 merged. That's a serious restructure of your whole financial system but it's taken 15 years. Everyone has said too slow but it's also been very difficult. And in response to collapsing asset prices and to difficulties in the financial system, the private sector companies in the private sector have responded by shrinking their asset values and by deleveraging. You'll see how crucially important that is. This is all very familiar in standing back from the GFC and you ask yourself what was that all about and try and collapse that into a few sentences. That was really an asset price collapse and subsequent deleveraging. We understand how to think about that although macroeconomic theory hasn't been very good at understanding that set of issues but don't let me go sideways into that discussion. The outcome was a protracted balance sheet recession and this recession led to deflation. There were occasional bursts of growth and the famous one is the mid 90s which was brought to a brutal end by a tax rise that came too early and which we all use for those of us who like talking about mistaken pursuit of austerity, that is a good example. Now the first of the slides that I'm pinching from Mr. Hayakawa's talk is this picture. The most significant of the imbalances which has been caused is this staggering question in relation to non-financial corporate sector investment. Normally corporations account for well over half of gross domestic product in advanced countries. They are the largest users of attainable savings and they use their own retained earnings and depreciation allowances but in normal times they borrow from the rest of the economy relying heavily on the household sector for funds but look at this picture. There's profits, the blue line and the blue line and there's investment, the red line, a staggering withdrawal from the circular flow of income by the corporate sector because it's unwilling to invest. You can say that that means that cash flow has been trapped in the corporate sector. Now it's also been the case that consumption hasn't grown rapidly, wage increases for regular workers have been subdued and you talked about that. Not just because companies have been reluctant to offer this but because unions have in the climate refrained from asking, real wages have been under real pressure. Now the macroeconomic, simple ECON 101 macroeconomic analysis that an outsider brings to this understanding is that there's a macro difficulty in those circumstances if both corporate investment and private sector investment are subdued and that's revealed in that simple piece of algebra for anyone who finds it helpful that aggregate demand equals the sum of consumption, investment, government expenditure and the trade surplus and if that demand, those demand components to remain equal to aggregate supply which I've written depending on the production system of the economy, its capital and its labor, if the Y on the first line is to remain equal to the Y on the second line and if both C and I are low, then there's an issue and if exports, if you can't have what we all love calling export lead growth that's strong enough then X minus M isn't big enough and you become what I describe as reluctant Keynesians. You either face an ongoing underutilization of resources or you have to increase government expenditure. Another way of putting the same point is the next semi-paragraph that it's the case that saving, that the leakages across the macroeconomy have to match injections and if savings are very bigger than investment and exports minus imports, the trade surplus is not big enough then G must be bigger than T, that's to say a deficit and such an excess leads to the accumulation of debt and that's the reluctant Keynesian explanation of why public debt has been rising has risen to astronomically unusually high levels in Japan, only during wartime elsewhere. Now, so this problem is pinned to the failure of the third arrow. No, that's looking forward, looking backwards. It's pinned to the failure of corporate investment to be large enough and this is where the discussion has to focus. Larry Summers and heaps of followers in America have discovered these ideas which they've given the grand name of secular stagnation and these ideas were relevant to Japan 15 years before people began to woke up to them in the US that when demography is such that population isn't growing, lower levels of growth needs less investment. Think of Jason's talk this morning, buzzing out of that talk was people like to invest where the markets are growing. This is the opposite of that, but secondly, there's been a failure to innovate which specialists will know about and I'm an outsider and just pick up what I've heard about this. One way of thinking about it is perhaps that much of that technological dynamism that we all thought was so wonderful about Japan 15 years ago was attached to the whole production system that grew out of manufacturing catch up in that great golden age from 1945 to the mid-1970s and the Japanese were amazingly good at that. Have they gone on being amazingly good enough? Many things, but perhaps not enough and certainly if the things that you're good at require low wage mass production technology of the kind that the Japanese car industry was so wonderful at, you do that now in China and in other places where and China's fighting it hard. You do it in Vietnam and you try and, it's not Japan any longer. Thirdly, the Japanese companies have relocated. Ever since wages have risen, I remember as a graduate school being told about the flying geese model of foreign investment. You take your stuff where you can find low wages and that stuff increasingly was taken out of Japan. Now, it's also the case, and here we go to Abenomics. This corporate hoarding instinct, not investing enough, was associated in the run up to Abenomics with policy failures. Not a competitive enough exchange rate and deflation which allowed high real interest rates which encouraged the deferring of investment. Now, I'm going to come back to a story about the need to have a depreciated exchange rate in a trade surplus. There are issues there of international cooperation and conceivability and possibility which have gone right back to discussions about Japan which many of us had with Max Gordon 25 years ago. Nevertheless, had there been a more depreciated exchange rate forgetting everybody else's objections, Japan would have grown more rapidly in the period running up to the Abenomics change and that growing more rapidly would have made it possible to avoid deflation and the high real interest rates that came with it. So, why have I now stopped being able to make this... I must have pressed a stop button but I can probably just go down like that, come to me. Brilliant. Yeah, now I want to go to... Perfect, can I just go like that? Yeah, very terrific. There we are. That's where it started. The first arrow was to address deflation through radical quantitative and qualitative easing and the depreciation was crucial. The second was fiscal expansion. This is to go backwards. We need to get the level of public debt down but first of all we need a fiscal expansion to make it go up even further. My friend Chris also has a wonderful metaphor about how if you're trying to turn a tanker to the left and you are located at the back of this ocean liner, the way to get the ocean liner to go to the left is to turn the rudder which will make the back of the ocean liner go the wrong way before the liner goes like that and there's something of that idea in this fiscal expansion initially but it was supposed to come along with structural reforms, the third arrow, bargaining power of labour, deregulation, corporate governance, increased spending, all that stuff but all that stuff was designed to overcome the difficulties of corporate investment that have been at the centre of my play in this story. And the first arrow has been very successful. Two more pictures, thank you very much from your talk. Just look at the left hand one, that's what it did to the stock exchange. That rising asset prices would encourage investment and look on the right hand side to what it did to the... This is the nominal exchange rate, isn't it? It's not real. And please don't look too far to the right in that picture. While it goes up, that's good news and we'll come to the last bit in a minute. That's terrific. The next thing was that deflation was really, I think defeated is the right word. Not comprehensively got to 2% with victory but this picture which you talked about earlier shows the CPI which is the hard line, less food and there's all sorts of jumble about energy and difficulties but look how different that is. We're out from 1314 until later 1516 which we'll come to. So too early to say defeated but certainly pushed in the proper direction until things again began to go wrong in 15. And finally, you talked about how growth rate has not been wonderful but the underlying supply side with low technical progress and low population growth has seen an economy in which the growth of productive capacity has not been rapid and even although this doesn't look terrific the output gap has very significantly narrowed and that in the end, I speak as a macroeconomic manager given the productive potential of the economy it's the output gap that you're attempting to deal with and there has been, we know, a move in the right direction. Terrific that first story until the last year and a half. However, it didn't have the effect of increasing investment as it had been hoped. For all the reasons that I talked about at length that were underlying the difficulty of getting investment up in the earlier period. Furthermore, many people now say that Japanese firms are taking the increased profits which have come as a result of the devaluation not as encouragement to get out and do more net exports and increase aggregate demand but instead to have a nice time with increased profits and not really bother as much and there is serious discussion about which way this set of incentives are pushing in discussion. Secondly, what devaluation does to consumers doesn't help either because it depresses real income and that depression of real income lower real wages and means that consumers spend less. And I'm looking at what's happening on the... Next to me, is there an announcement that I should stop to allow you to make? But it looks from the busyness as if there may be an announcement so we should all look forward to this. So, the second arrow has become... has been problematic. Balancing the requirements of growth and fiscal consolidation has been really difficult. And guess what? 2014 tax increase, it looks like the abinomic story of, remember my ocean tanker, go the wrong way before you start going the right way. The attempt was to try and make the back of the ocean tanker go that way too soon. And when you do that, you don't end up with the ocean tanker going the right way, it goes that way. And that is what has happened with that tax increase. And everyone now thinks that postponement of the budget balancing moves is the right thing to do. First of all postponement and now even the fiscal stimulus is the right way to go. But look what that does to your final picture on your talk shows us what that does. The red line was what abinomics was meant to do, get the surplus back into a positive, minus, minus, get it into a surplus red line. But actually we look like with the change in fiscal policy postponing that, that's now minus two and it goes off the page at minus two. The third arrow has even of course been, as you'd expect me to say, unfinished business. And the reminder of why is just to take you back to what I talked about earlier. Demography, not enough innovation, relocating to the rest of the world. But that's an important point, a caveat, which Ambassador Sumira Kosaka raised in his talk to a group of us last night at dinner. To the extent that the national economic model becomes one in which you invest abroad and repatriate income and that income gets spent domestically. And the focus of that is that gross national income grows more rapidly than gross national product. To the extent that you can do that you can steer around this going abroad feature and increasingly in a globalized way that's one of the things that you should be imagining you should do to moderate the difficulties that we've been describing. And all of these features, as I said at the bottom of my slide, call us back to what Jason said at his talk at the beginning of today. Much of your talk was about the sorts of policy movements that the Japanese might make in order to steer around these underlying difficulties. No, that's the wrong word. Try to reform these difficulties that stand in the middle of the problem in the way I've been presenting it in this lecture. Now, why did I say that it's harder to carry out abonomics now than it would have been 15 years ago? Well, this has been a world in which there's been a very slow global recovery from the GFC. All of us hoped that we'd be in a much better place in the advanced industrial world than we are now, pushing 10 years from the crisis which began seriously in 2007. I am one of those who think, along with the most famous to it, much more famous than my discussion of this theme, Paul Krugman in the UK and Simon Rhett in the US and Simon Wren Lewis in the UK, who have been ever since the beginning very clear-minded opponents of austerity. And it's clear to understand that the G20 meeting in London in 2009 and in the previous meeting in Washington in late 2008, there were agreements both in London to stimulate aggregate demand by 2% of world GDP, a huge stimulus discretionary in London. And that followed the determination to allow the automatic stabilizers to operate. That's to say when activity falls and tax revenues fall, you don't put up taxes, you allow a deficit. Probably even two or three times as important as the London decisions. In 2010 in Toronto, global leaders led, I'm afraid, by our then Chancellor of the Exchequer and Schoibler from Germany and an entangled American administration towards an agreement to cooperate globally in doing austerity. And this cooperation to do austerity globally has led very directly to exchange rate warfare. The non-cooperative prisoner's dilemma, I want my growth to rise. I'm not prepared to allow demand to increase in my country, so I'll carry out QE to devalue the exchange rate and steal jobs from other people. And that's the world that we've been living in since then and look at what that does to the exchange rate in Japan and the last part of the story. And I think that is a part of why exports have not recovered and I think it's also a part of why the inflation story has gone backwards from the achievements earlier on. I would also add, and I'll say in a minute when I get to that point in this slide, that this exchange rate movement has been part of what Elaine Ray and her, in a wonderful paper she gave at the European Central Bank meeting in Cintra two months ago about how global portfolios are properly thought of not using the efficient markets hypothesis which has bedevilled much of economics, but instead a serious understanding of the portfolio preferences of international investors. And in those circumstances, when things like Brexit happens, you run for safety. And one of the things that you did in running for safety was run for Japan. Unconnected, importantly, unconnected, but a globalised world and in a global world you go to the one that's nearest to you when you're uncertain and that's part of what's happened to the value of the Yang. But the additional point that I want to make is simply that world markets are not growing. It's very difficult to sustain aggregate demand growth in a world where world trade has been growing so extraordinarily slowly. But more than that, and again Elaine Ray has talked about this, the international transmission of conditions in credit markets from country to country mean that none of us as macroeconomists are anywhere near as confident as five or ten years ago about the ability of one country to isolate itself from global conditions in global markets. And this has been a world of uncertainty in global markets in which investors in Europe and the US as well as in Japan will not invest. And that's to do with a whole sequence of uncertainty difficulties. And they have imposed themselves on Japan. So you can see why what I've said on this page says to you if you tried Abonomics ten years earlier you would have found it a lot easier to try and do it than now. But is this a crisis? I think that the proper way of thinking about this is to compare what's happened in Japan with the uproar in my own country that led to Brexit, the uproar that's leading to Trump, the disaffection in much of Europe about a very important part of the social community feeling disengaged and left behind by the growth model that their political leaders have adopted. And this has not been true in Japan. Although, says the economist, summarizing this point very clearly, the expectations of Abonomics have not been met and progress has been incremental. Nevertheless, Mr Abe's method has been to make partial progress on many fronts at once. And most importantly, this in one sentence says, thanks to high employment and a cohesive society, Japan feels little sense of underlying urgency. Japanese seem to prefer two words I can't pronounce properly, kaizen or continuous improvement, to kaikaku, a pejorative word for reform. I don't think that this is a crisis. I do think that the northern European and US economies for different social reasons face a crisis. But my talk says that it might go on for a long time. It depends on whether investment can be made to rise and as I've said crucially, this depends importantly on what happens in the rest of the world. And so I end with the $64 million question, when will public debt begin to come down? And the answer is who knows. But I am not one of the people who thinks, unlike John Plender, whose wonderful piece swerves into a prophecy of universal crisis for the all of mankind because of the size of the Japanese public debt, my view is that however difficult it will be, once growth begins again, and it will happen, and once inflation goes above 0, 1, 2, and maybe 3, maybe even a little more, we will see public debt begin to fall. It will happen slowly, just like it did after the Second World War. We all have very short attention spans, but this is going to be a generational project to get public debt again down after what has happened. I don't think that this not quite a crisis, slow reform, gradual as she goes, is going to be anything other than a very gradual process of rectification of these imbalances, but it will take a very long time. Thanks. Thank you, Mr. Speaker, so that David raised a very important point. If you know how to increase the growth, everything solves, but it's a difficult program. And also, Mr. Hayakova pointed out the very important lessons, so that maybe you have learned in an undergraduate macro textbook, so corporate sector is the investing sector, and household sector is the saving sector, but corporate saving has been continuing more than 15 years in Japan. And everybody thought it's just something happened in Japan, maybe due to the crazy policy, but that kind of thing is happening all over the world. That is kind of something mentioned in David Vines' presentation as well. We have several minutes, so I would like to have some questions and comments. So, Stan, could you tell your name and affiliation? Thank you for your presentation. My name is Vibhore. I'm a master's student, so I would like to talk about the economics of Olympics. Historically, Olympics has been a loss-making exercise. Apart from Los Angeles, 1984, we have the example of Sydney, 2000, the economic disaster of Athens, 2004, and Rio would join that list. So, as the government of Japan may take in steps to make sure that Tokyo 2020 is not an economic disaster, or is it an exercise in soft-power projection, and can Japan, if it is a loss-making exercise, and can Japan sustain that given the current state of economy? Well, I don't think... Maybe the microphone. Here is that. Okay, I don't think the Olympic causes a disaster in the Japanese economy, but, well, many Japanese kind of expecting that the Olympic game has a very stimulating effect on Japanese economy, but I don't think so. Well, if the current situation is that we have a large unemployment in our country, then the probably Olympic games can stimulate investments of force and therefore it's good news for the economy. But, well, we are already starting from full employment. Then you can expect an expansion just during Olympics games. Usually, resources spent preparing Olympic games is not as productive as your private investment, so that usually you expect, to some extent, rather deteriorate the productivity of the economy. So, I don't expect a disaster, but I do not dream of the recovery of Japan because of the Olympics. There's no reason to believe that. That's my answer. David, do you want to add something? No, it's very clear. I'm teaching the first-year undergraduate student a bit of the superior segregation with the Olympic game and the growth. Maybe if you see Tokyo or Seoul and Beijing, growth rate is high when the Olympic game is on. The other way around, because the growth is high, they are hosting Olympic games so that it's not so easy to evaluate the Olympic effect. Do you have any questions? You're about Brazil. Thank you. Two comments to David's presentation. You said the big gap between saving and investment, which is actually a positive one, allows government expenditure to continue to go over the revenues. I'm wondering about the saving investment ratio in Japan. Even the demographic change, the rapid folding of saving ratio, so therefore you can see the gap is narrowing. So in a way that has become intolerable for Japan to continue to have this, you know, the gap between revenue and expenditure, that's a common one. The second one you actually mentioned towards the end of a conclusion, very important point, the folding of investment in Japan is very much due to the failure to innovate. So I think it's a very important dimension in the era of three of the structural reform to find the impetus to innovate. I don't see a third reason you listed about the migrant industry to offshore in the lower end. It's actually preventing Japan from becoming more innovative. It's actually the way to go, you know, but high end continuing Japan to be innovative. There's a certain room there for that to happen. So the trigger for that one. Mr. Hayat came up with a very interesting presentation, very updated. My comment is that it seems to be very unrealistic to have the potential growth rate rise to 2% in the short run. The reason is very simple. Potential growth rate is determined by the growth rate of labor force which is falling in Japan. Secondly, it's about improvement, the speed of improvement of productivity, which is also very, very low. So this is one dimension. The other one is about the gap between the two actual growth rate and the potential growth rate. So lift that one through reform. So what is the prospect of doing that one through the structural reform? Finally, it's about you mentioning that a negative interest rate policy is actually more sustainable compared with the cumulative easing. So what is the justification for that argument? The only thing I can say is that it's because the Japan government is heavily on debt. So therefore, negative interest rate is actually good for the debtor. But I don't know. Thanks. I think two questions to David and three questions to Mr. Hayat. Okay, so... If the savings gap is narrowing, that's a good thing. But it doesn't yet seem to be narrowing enough that final projection, which I put up from your talk, still showed the deficit of 2% of GDP going through to 2020. Given that the whole of the management of the Japanese economy is being done by people who would love to close that deficit, if only they could, that projection is a story about the private sector savings investment gap still not narrowing enough, improving, but still... That projection suggests not enough is really all I can say about that. Innovation is crucial. I don't have anything interesting to say about that, and perhaps you do. On negative interest rates and QE, I think that we've found, even in Europe, that this difficulty for the financial system of actually having its lending impeded by negative interest rate policy is a real problem. But I don't yet see any alternative to it. It just makes the only available weapon less useful. But just because you show that the only available weapon is less useful, you don't somehow celebrate and say let's declare victory, which many people seem to think that simply not using the most available weapon would enable them to wake up in the morning and find the world that fixed itself. And I don't think that's true. With respect to the potential rate of growth, I never thought of Japan's potential rate of growth up to 2% in the last two years or so. It is the assumption under the government program for the consolidation of Japan's fiscal conditions so that I do not believe that, but it is the assumption of the government. And also with respect to the negative interest rate and QE, as I mentioned, Bank of Japan already absorbed nearly 40% of long-term JGB outstanding. So if you continue buying 10 trillion yen per month, it cannot be sustained. It's logically impossible. So on the other hand, let's say 0.1%, 0.3% negative interest rate, which can be sustained. You can continue that policy a long time, so that's at least more sustainable. But at this point, actually during the presentation, Professor Bank of Japan released the policy choice this time. Actually, no real action this time. This is a live commentary on the current policy. But basically they determined kind of two things. One is they said that kind of yield curve control, but it's basically kind of targeting on long-term rates. Bank of Japan always said that declining long-term rates is good news, but recently Governor Kuroda, as well as Deputy Governor Nakasato started to talk about side effects of two flattened yield curve. Therefore, they said that there's implicitly sort of a target that the 10-year rate be around zero, not 0.2% like that. This is kind of a long-term rate targeting. So they introduced that sort of scheme. And the second thing is that actually they admitted kind of overshooting. In the past, this is kind of already sort of a determined policy. They said that Bank of Japan continued quantitative easing, not just achieving 2%, confirming that over 2% inflation stabilized. So that to some extent, Bank of Japan naturally allows some sort of overshooting, say, CBI inflation rate, not just for 2.5% kind of 2%, it's a, you know, Ipe knows well, but certainly this dynamic control requirements not sort of overshooting. So that's actually kind of a common sense among the macro economists, but actually Bank of Japan formally admitted said the possibility of overshooting. That's basically two determination which they made this time. This is an outcome of a comprehensive assessment. Thank you very much. So David, would like to add something? Let me just say two things about long-term interest rates. I sound like someone who thinks that long-term interest rates are a good idea for however long they're needed. And I am such a person, but I'm also somebody who is aware of how serious the side effects of these are. Let me say what I think is the major one, it bankrupts most of the pension systems in most of the advanced countries. And so if you want people like me to be able to live in their old age in a sensible way and you continue with low long-term interest rates, then you're piling up fiscal obligations on the state that will either have to declare me to get no pension and sorry have a bad life or else adopt the debt as higher public debt. Serious negative implications of perpetual long-term interest rates. So my second thing is to discuss what happens when at last growth begins to pick up and we begin to go back towards the new normal and we begin to go down that wonderfully exciting tapering world. My ocean tanker is a good example. It's quite difficult to steer an ocean tanker when you have to make the backward part go the wrong way when you're trying to go somewhere. But that doesn't mean that steering the tanker is impossible and the task facing policy makers is very simple in the following sense. You only have to rise the interest rate when growth has begun to pick up enough to make inflation again a problem. Now to say, but excuse me, when you raise the interest rate that will cause a great recession and everything will collapse is in danger of being a logical contradiction because the policy maker doing this would look at you and say, don't be so stupid. I'm only raising the interest rate because the economy is growing too fast. If I face this collapse which is frightening you, guess what? I would lower the interest rate again. What's more, everyone will know that I would do that. So the prospect of this causing itself to collapse is, I think, a piece of magical misunderstanding. That's not to deny that steering the way through the middle will be difficult. Just like steering the ocean tanker. But there is a way through the middle and to assert that any attempt to go on the tapering world is necessarily going to cause the universe to implode. Is the John Plender error in his discussion which I recommended to you so much, but I will now finish by saying only for the first part of what he said, but not the second part. I think chairing two talkative presenters are good, but... OK, so the last quick question because I'm using the advantage of a chair. I would like to ask one question. How do you respond to the hypothesis that some researchers are putting about that Japan, because it entered the demographic transition much earlier than all other developed nations, was the Canary in the coal mine. And the policy makers really don't know how to manage a world economy where every developed nation, or just about every developed nation, has now passed the point that Japan reached in 1990, they passed that point somewhere between 2005 and 2010. I have the same question. Can I follow you? When we discussed this kind of thing ten years ago, lots of people thought it's something specific to Japan, just due to the stupid policy. But nowadays, lots of developed countries are following what Japan followed. Maybe I'm following your question. Do you think is it something specific to Japan or maybe other developed countries also follow what Japan followed, or if you find any differences, it would be great if you mentioned this. Is it okay? We're both. Yeah, we're both. Well, talkative is great, but we have been running out of time. Yeah. Okay. Demography, of course, is kind of common. Not only advanced economy, but also many of East Asian countries, like China, Korea, so this is kind of common. One sort of particular thing about Japan is one is that, well, we are too slow in response to the problem in the financial system. You know, we, yes, bubble burst in 1990, but, you know... 15 years, yeah. 15 years. 15 long time to restore financial system. That's also kind of a situation in Japan. In that respect, U.S. response was very fast, but Europe is not necessarily so. Exactly. That's a difference. And also, one other big problem is that, you know, in the last session, women talked about the problem in Japan's labor market. And that's not just women, but various problems in Japan's labor market. So something, in particular in Japan, I think one is a slowness in the response against corruption in the financial system. And that's the thing is probably a problem in the labor market. So I think, in that sense, U.S. is much better in terms of respect, but they have their problem. You all up seems somewhere in between. Yeah. Okay, so it's your turn. You're dead right about the canary in the coal mine. That's a way of putting what I said about Larry Summers. He woke up to this 15 years after people for Japan woke up to it. And let's be clear that there are probably enough people in the world. And out there are people who worry about climate change and all sorts of raw material difficulties. So economists are better understand how to manage a world in which in 80 years' time the population won't be growing. Here's my medium term resilement from that challenge, running away from it. It's very like after the Second World War when people began to realize that what was needed was development of the underdeveloped regions. Development economics didn't begin until, roughly speaking, Galbraith went to India and came back and told everyone in Harvard it was important. But it had begun earlier in Europe with the development of Eastern Europe. And that's why the World Bank was founded to enable advanced countries to grow by exporting useful things, capital equipment, projects, bridges, you name it, to the emerging developing part of the world. Well, there is still... Rosgano will give you a speech about how that's important still in China and India. And if only we could ensure that world financial markets would safely transfer capital to those parts of the world where there are still two and a half billion, three billion really poor people that need capital investment to develop. That's the job. And then there's Africa where the population is going to be very slow to stop growing. That's the job for the next 50 years. And I would say that the task in the next 50 years is finding a way safely internationally of transferring capital to places that need it. And that's a huge task in international management. Maybe you'll reverse some of that as well in terms of transferring capital in the other direction. Yes, and we're seeing how difficult that is at the minute. Certainly. Have you satisfied? Okay, do you want to talk more? Okay. Okay, so please join me in thanking two lively presenters who really present us for the fantastic. Thank you all.