Xing Ziqiang is the Chief Economist of Morgan Slee China and a member of the Board of Directors of the China Chief Economist Forum
(This article is the fourth issue of the "Chief Discussion" of the China Chief Economist Forum, "New Directions for Global Monetary Policy: Implications for China", and Xue Qinghe, the director of the "Chief Discussion", interviewed Xing Ziqiang, and formed the final text.) ）
The future of the U.S.-Japan monetary policy will not only affect the global macroeconomic and financial markets, but also have reference significance for China's policy framework.
The "three highs" (high growth, high inflation, and high interest rates) situation in the United States will continue, just like a replica of the 90s of the last century, when the three forces of the AI revolution, population growth, and energy investment pushed up the center of economic growth and inflation, resulting in persistently high interest rates in the United States.
At present, inflation in the United States is sticky, the job market is strong, and the expectation of interest rate cuts has been postponed. According to the data, in March, the US CPI rose by 3.5% year-on-year, an increase of 0.3 percentage points from February, exceeding market expectations. Excluding volatile food and energy prices, core CPI rose 3.8% year-on-year, unchanged from February. Non-farm payrolls increased by 303,000, well above market expectations of around 200,000. The ISM manufacturing PMI returned to expansion territory, exceeding 50 for the first time in 16 months.
The market predicts that the United States will keep interest rates high for longer, i.e., higher for longer. At the end of last year, many institutions predicted that the Fed would start cutting interest rates sharply in March this year, cutting interest rates by 150 basis points or more in a year. And I thought before that the Fed would "let the bullets fly for a while" and would not rush to cut interest rates. This change is of course related to the stronger-than-expected economic and inflation indicators in the United States this year. So why is the U.S. economy so resilient?
It seems to me that the United States is now facing a major change not seen in decades. The root cause of the persistence of high growth, high inflation, and high interest rates is that the United States is replicating its 90s, and three factors have kept the growth center of the United States high: the first is technology, the second is population, and the third is energy.
First, the scientific and technological level. The technological revolution, especially the rise of AI, will significantly increase corporate investment in the short term, and may boost productivity in the medium to long term. Just like the Internet revolution of the 90s of the last century. From 1988 to 1992, the U.S. economy was relatively weak and its fiscal deficit was high. In 1992, Clinton came to power and proposed to improve the fiscal deficit. During Clinton's tenure, the United States coincided with a round of Internet technology revolution, and in the mid-90s, the United States invested by leaps and bounds in IT equipment, including cables, broadband equipment, and computer rooms. A large amount of corporate investment also led to productivity progress in the mid-to-late 90s. Until the end of the Clinton administration, the United States did achieve a fiscal surplus. As the Internet revolution has elevated the center of economic growth. From 1994 to 1995, the Fed cut interest rates slightly, but briefly. Interest rates remained at a certain level until 2000, when the Nasdaq bubble burst.
Today's U.S. is similar to the 90s of the last century, the AI revolution is still in its first phase, and the U.S. corporate sector will invest up to $3 trillion in this area this year and next, mainly in IT equipment, semiconductors, and data centers. In the medium to long term, will these investments translate into sustained productivity gains that replicate the Internet revolution of the past? We recently hosted a tech summit in San Francisco, which included founders of some of the most well-known AI companies in the U.S., as well as hundreds of companies of all kinds. Indeed, it can be observed that AI is being applied in the commercial field. Some large Internet companies are using AI tools to help programmers develop software, some financial companies are starting to use AI for robo-advisors, some consumer companies are starting to use AI for intelligent marketing and customer service, and entertainment companies are starting to use AI to generate content. Over time, AI applications can become more widespread, and it has the potential to replicate the Internet revolution of the 90s and boost productivity and economic growth in the United States.
Second, the demographic aspect. Over the past three years, the U.S. population has grown significantly faster than expected, with 2.6 million to 3 million new immigrants each year, nearly 2 million more per year than in a normal year before the pandemic. Although this has also sparked discussion of some social issues, the US Congressional Budget Office has also calculated that it will help to significantly increase the US economic growth potential from both the supply and demand sides. The massive increase in the immigrant population in the United States is similar to that of the 90s. At that time, the labor force participation rate in the United States increased dramatically, and there were more and more dual-income families. The contribution of the increase in labor force to the economy is expected to replicate the 90s.
Energy. After the shale gas revolution, the United States became largely self-sufficient in energy. The impact of the recent geopolitical situation on the energy security of the United States is relatively small, and it has played a certain role in maintaining the stability and resilience of the United States. However, the United States also wants to focus on the green energy transition, and after the introduction of the "inflation deflator bill", government support has been provided for new energy investment, which has also driven the investment enthusiasm at the infrastructure level.
Taken together, the current AI revolution and population growth in the United States replicate the 90s of the last century, coupled with the promotion of energy investment, which has jointly pushed up economic growth from the supply and demand sides, and the U.S. economy may maintain relatively high growth and high inflation, while the situation of high interest rates will remain higher for longer. Even if the Fed's interest rate cut occurs this year, it should be in the second half of the year, and the decline for the whole year will not be too large, far worse than the market expected last year.
Japan's decades-long fight against deflation, from looking ahead and backward to going all out, has finally made amends, which can be described as a profound lesson.
In contrast to the United States, which replicated the '90s, Japan's main question is how to get out of the deflationary period that has been in place since the '90s. There is now a light at the end of the tunnel, and the central bank's monetary policy is gradually normalizing.
On 19 March, the Bank of Japan (BoJ) announced adjustments to its monetary policy framework, deciding to raise the short-term policy rate from -0.1% to 0-0.1% and scrap the yield curve control (YCC) policy. This is the first time in 17 years that Japan has raised interest rates, and the negative interest rate policy has come to an end. The move marks the beginning of the normalization of ultra-loose monetary policy, which has been maintained for 11 years.
The main reason for the BOJ's monetary policy pivot was the rise in inflation. In 2022 and 2023, Japan's CPI will reach 2.5% and 3.2% year-on-year respectively, and 2.2% in January 2024, in other words, Japan's inflation rate has reached the 2% target set by the Bank of Japan for more than 20 consecutive months. If last year there were fears that Japan's reflation would be temporary imported inflation (higher import prices), this year's "Haruto" wage talks were encouraging, with large companies promising a 5.28% wage increase, the largest increase since 1991. This means that a virtuous circle is forming between rising wages and prices in Japan, which is called "good inflation". The ensuing round of monetary policy pivot by the Bank of Japan is also historic.
After the bursting of the real estate bubble in the early 90s, the Japanese economy experienced a long period of deflation, and Japan's policy response has many experiences and lessons worth considering.
First, after the bursting of the housing bubble, the Japanese government did not quickly adopt easing policy, whether monetary or fiscal. For the initial period, remain cautious, fearing that the bubble could restart once policy is eased. Looking ahead and looking backward is the best time to break deflation. From 1991 to 1995, the Bank of Japan also gradually cut interest rates, but not enough, resulting in real interest rates higher than GDP growth for a long time. Our analysis of more than 100 economies over the past 100 years shows that the way to successful deleveraging is to keep interest rates two percentage points below GDP growth so that moderate inflation can be promoted, and modest deleveraging and economic recovery can be achieved. At that time, Japan's real interest rate was higher than the GDP growth rate, which increased the real debt service burden, resulting in deleveraging and higher leverage ratios, and the challenge of deflation was severe.
Second, Japan's fiscal policy and monetary policy are not coordinated enough, and when monetary policy is loose, fiscal policy is tight, and there is rarely a coordinated easing between the two sides. And when fiscal policy is loose, it tends to be directed towards investment, supporting infrastructure and manufacturing, rather than consumer demand. Although Japanese manufacturing companies have made great progress in going overseas during the long-term deflation period and continue to maintain a certain degree of global competitiveness, the Japanese economy has not been able to get out of deflation due to the insufficient policy boost to domestic demand. After a long period of deflation, the Bank of Japan also invited former Federal Reserve Chairman Ben Bernanke to share with his Japanese counterparts the causes and lessons of the Great Depression in the United States. Bernanke pointed out that when the economy falls into a depression, the first response is to adopt stimulus policies to stimulate inflation. Stop deflation first, then adopt structural reforms.
After Abe came to power in 2013, the Japanese government explored "Abenomics" to break deflation. The Bank of Japan (BOJ) implements a yield curve control policy while pursuing a negative interest rate policy, with the goal of raising inflation to 2%. Combined with fiscal easing, by 2024, the goal will be gradually achieved, and Japan will begin to withdraw from unconventional monetary policy and normalize monetary policy. It can be said that Japan finally learned from the experience of the United States, but it also paid the price of 20 years of "loss".
China can learn from the experience and lessons of the United States and Japan, step up macroeconomic policies, strengthen the coordination of monetary and fiscal policies, focus on supporting consumption, and push the economy out of low inflation.
The new paradigm of monetary policy in the United States and Japan is of great significance for China. Now the United States may be replicating the 90s of the last century, and Japan has followed the example of the United States in emerging from deflation. At present, China's economy is facing a new cycle, with great pressure to clear debts and persistently low inflation. In order to pursue high-quality development and enhance new quality productivity, how can monetary and fiscal policies exert force? China can learn from the monetary policy experience and lessons of the United States and Japan, and implement effective macroeconomic policies to promote moderate economic reflation.
First, macroeconomic policies can be strengthened, and there is still room for further RRR and interest rate cuts, which will lower real interest rates, reduce financing costs and debt repayment burdens, and achieve moderate deleveraging.
Second, fiscal policy and monetary policy should be effectively coordinated and coordinated, fiscal efforts should be strengthened, and the direction of expenditure should focus more on consumption in addition to investment in technological upgrading. Economic development and innovation is an ecosystem, and the development of new quality productivity is not only focused on supply, but also on demand, especially final consumption. When domestic demand is insufficient, a large amount of investment is prone to trigger a decline in returns and a downward spiral in prices. On the contrary, we estimate that if the broad fiscal sector can be expanded by 7-8 trillion yuan in the next two years, with a focus on supporting consumption, it will help break the expectation of low price cycles.
In terms of specific support methods, European and American countries adopt the method of directly issuing money and coupons to residents, and China can achieve this by improving social security, which is also in line with the direction of common prosperity. For example, more money will be invested in medical care, education, pensions and affordable housing, so that social security will cover more people, including more than 200 million migrant workers. If these low-income groups can enjoy the city's public benefits, the pressure on defensive savings may be reduced, which in turn will release consumer demand and break the current cycle of low prices. Strong domestic demand is also conducive to promoting high-quality development and the improvement of new quality productivity.
Finally, the market is highly concerned about a topic: whether the PBOC is likely to buy government bonds or even implement quantitative easing, I think that compared with the US Federal Reserve and the Bank of Japan, the PBOC's monetary policy mix and currency issuance mechanism are very different. In the past, the PBOC used to control liquidity mainly through open market instruments such as central bank bills and medium-term lending facilities (MLFs), while using structured monetary instruments to provide relatively low-cost loans to specific sectors. Overseas QE tools are implemented only if the interest rate tool has become ineffective. After the central bank lowered interest rates to the extreme, it had to increase the supply of base money through long-term one-way purchases of medium- and long-term government bonds. This is an unconventional form of intervention.
At present, the People's Bank of China has more conventional monetary tools and more space, and we can also cut the reserve requirement ratio, cut interest rates, and structural monetary tools, such as the recently established re-lending quota of 500 billion yuan for scientific and technological innovation and technological transformation, so there is no need to implement quantitative easing policy in the short and medium term.
Of course, the open market operation through the purchase and sale of government bonds is a step for the PBOC's monetary policy to gradually converge with the world's mature central banks, and as the Chinese government bond market becomes more mature, the PBOC can also use treasury bonds as one of the main tools for open market operations. In short, China can learn from the United States and Japan, improve monetary policy tools, strengthen coordination with fiscal policy, focus on increasing support for consumption, and push China's economy out of low inflation.
