Advertisement
Features

Japan’s lesson in "people's QE" for Jeremy Corbyn

The idea of people’s QE has reignited interest in radical monetary policy. Marina Gerner looks at the lessons from Japan’s version of people’s QE: the voucher schemes of the 1990s.

151013-yen
Does handing the people stacks of cash do any good?

The idea of "people's QE" has reignited interest in radical monetary policy. Marina Gerner looks at the lessons from Japan's version of people's QE the voucher schemes of the 1990s.

What's "people's QE" all about?

Traditional QE involves the central bank creating money to buy financial assets, such as shares and bonds. The idea is that the extra money created will find its way to firms and households through a combination of extra bank lending and higher asset prices.

Advertisement - Article continues below

However, as the former head of the Bank of England, Mervyn King, has admitted, this may not help if firms are reluctant to borrow. So some economists have suggested that the central bank should print money to finance the deficitdirectly.

Other ideas are for the Bank to lend money to companies (as in the 1930s) or to use it to fund public works ("people's QE" Corbyn's suggestion). A final idea is to give it directly to the population which Japan did in the late 1990s, in the form of vouchers.

So what did Japan do?

Both supporters and opponents of voucher schemes like to point to Japan's example. In March 1999, the Japanese government decided to give 31 million shopping vouchers to its population. Localgovernments handed out vouchers worth 20,000 each (about £100 at the time) to families and the elderly.

Advertisement
Advertisement - Article continues below

Families received a voucher for every child under the age of 15, regardless of their income. In contrast, vouchers for the elderly were means-tested about 56% of the over-65s qualified.

Advertisement - Article continues below

In total, the vouchers were worth 620bn (about £3bn). The vouchers came with two caveats: first, they expired within six months; second, they had to be spent at shops within the recipient's own local community.

Why did Japan do this?

Japan was stuck in its worst recession since World War II. The property and stock boom of the 1980s culminated in a massive bust at the end ofthatdecade. From an era of almost non-existent unemployment, joblessness rose to 2.2% in 1992 and to 4.7% by 1999 following the end of the 80s bubble.

The ageing population, anxious about unemployment, salary cuts, and further deflation, was spending less on consumer goods, exacerbating the downturn. Interest rates were already around 0%, so could not be cut further to stimulate more borrowing and thus, hopefully, demand.

So Japan launched its shopping vouchers programme,hoping that this would stimulate consumer spending.

What was the general reaction to the idea at the time?

At the time, the programmewas harshly criticised few economists believed it would be successful. Rather than fearing an eruption in inflation, most simply thought it wouldn't make a difference.Professor Masaru Takagi of Meiji University called it an "immature ideawe're being treated like children receiving our cash envelopes from grown-ups at New Year".

Advertisement - Article continues below

The journalist Mark Magnier asked: "Will this massive mound of Monopoly money revive consumer confidence and restore Japan's economic pulse? Tax cuts announced in April haven't done a whisper of good, after all."

Currency researcher Stephen DeMeulenaere believed that the programme would have no effect: "The traditionally thrifty Japanese will simply spend these vouchers on 100% voucher purchases and keep their money in the bank."

Advertisement
Advertisement - Article continues below

The programme sparked criticism of the Liberal Democratic Party, the leading party of the coalition government at the time, with critics saying that politicians had no clue as to how to revive the economy.

Did it work?

In the end, the voucher scheme had mixed success. Supporterspoint to an academic study conducted by Hsieh, Shimizutani and Hori (2010), which found that the coupons did indeed have a positive effect on consumer spending. In particular, spending on semi-durables, such as clothing, waspushed higher. And there was no evidence of a reversal in spending after the coupons were used up.

Advertisement - Article continues below

However, while the effect was somewhat positive, it was also very limited. Individual consumption only went up by around 0.1-0.2% of GDP and failed to increase long-run consumption. Overall, the programme did not ignite inflation or help Japan out of its economic rut.

What's the lesson for the rest of us?

It's hard to judge the effectiveness of voucher schemes from the Japanese experience. Firstly, since the vouchers came from the government rather than the central bank, it was really a fiscal, rather than a monetary, stimulus so more like a tax cut than QE.

More importantly, the size of the scheme was tiny compared to the size of the Japanese economy. To put it into perspective, Japan's nominal GDP was $4.7trn in 1999, which means that the scheme amounted to a stimulus of less than 0.2%.

And what does it mean for more radical forms of QE?

In short, it's hard to use Japan's voucher scheme to predict what a larger scale, genuine version of helicopter money would do if direct QE were carried out on the scale of conventional QE, for example, you would expect it to be extremely inflationary, especially at a time when wages are finally starting to rise.

There are also concerns that using money printing to fund the deficit or carry out infrastructure projects would set a dangerous precedent and make the government much more reluctant to cut the deficit.

Advertisement
Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/economy/uk-economy/601429/mervyn-king-why-the-covid-pandemic-is-a-classic-example-of-radical
UK Economy

Mervyn King: why the Covid pandemic is a classic example of radical uncertainty

This week, Merryn talks to ex-governor of the Bank of England Merryn King about the pandemic and how to prepare for a future that is unknowable; the g…
2 Jun 2020
Visit/economy/uk-economy/601426/stealth-debt-jubilees-are-here-and-thats-a-good-thing
UK Economy

“Stealth” debt jubilees are here – and that’s a very good thing

We may not have had a full-scale debt jubilee, but many Covid relief measures quietly amount to “micro-jubilees”. That’s something to celebrate, says …
1 Jun 2020

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020