Japan’s Abenomics: 3 out of 5 Arrows

by John Brian Shannon originally published at JohnBrianShannon.com

If the fundamentals of an economy are sound, any conceivable shock to an economy will eventually dissipate and normal economic flows will resume. (Every economist knows this)

Unfortunately for Prime Minister Shinzo Abe of Japan he inherited an economy where the fundamentals were unsound, and more than one economic parameter was out of alignment. Which is a different way of saying the Japanese economy was going to fail on his watch, or early into the next Prime Minister’s watch.

The unexpected shock of the Fukushima-Daiichi meltdown and the subsequent shuttering of Japan’s entire nuclear power plant fleet didn’t help Japan’s economic matters. Some 29% of Japan’s electricity was produced by those (cheap to operate) nuclear power plants. Many of those n-plants are now undergoing decommissioning, or are still offline.

Mr. Abe’s Three Arrow policies were necessary, timely, and for what they are, effective. In retrospect, there was no other way for Japan to proceed. The country’s economy would have imploded had the Prime Minister not acted so appropriately.

When Prime Minister Shinzo Abe took office in December 2012, he announced a strategy – comprising three “arrows” – to overcome the economy’s combination of slow growth and low inflation: [1] very easy monetary policy, [2] a short-term fiscal stimulus, and [3] structural reforms to labor and product markets. But the government’s economic policies (so-called Abenomics) have not fixed Japan’s problems and are unlikely to do so in the future.” — Professor Martin Feldstein writing in Project Syndicate

However, I suspect that even Shinzo Abe knew that it would take more than Three Arrows to reset Japan’s economy. But they are a great start to putting Japan’s economic fundamentals where they need to be.

It will take two more ‘Arrows’ to return Japan to a balanced state — the ‘steady state’ where a fundamentally sound economy can withstand moderate political or economic shocks.

Mt Fuji from Yokohama, Japan. Image courtesy of comeonoutjapan com
Mt Fuji from Yokohama, Japan. Image courtesy of comeonoutjapan com

Arrow #4 must surely be an inheritance tax of some significance. Japan’s diminishing population pyramid means that domestic demand will continue to taper. An inheritance tax can help to counter that loss in government revenue.

With falling tax revenue due to a shrinking population, the government needs money to operate — providing the same infrastructure, but to a shrinking population. In Japan’s case an inheritance tax of 25%-50% will allow the government to maintain services in the face of falling income tax and other tax revenues.

Arrow #5 must be raising corporate taxes. Voters will not accept the twin assault of higher inheritance taxes and an already proposed Value Added Tax increase from 8% to 10%.

That will only result in widespread public disaffection and Prime Minister Abe being voted out of office after doing so much good work.

If voters are expected to shoulder a higher tax burden then corporations must also pay their fair share. If that means that corporate dividends for wealthy investors are a few cents lower, well, that’s just too bad.

By raising inheritance taxes and corporate taxes, the government should hit zero-deficit within 3 years.

At that point the Japanese economy will return to a ‘steady state’ where it can flourish as a fully functioning economy.

Although I’m a fan of massive stimulus; At the early onset of economic downturns, massive government intervention works well, but continuing to massively stimulate an economy for longer than 5 years, we reach a point of diminishing returns in the 6th or 7th year.

That is why, in order for government intervention to be most effective, it must be massive, it must be early, and it must continue for 5 years or less. (Less is better)

Other economic levers must also be applied. We can’t expect stimulus to solve fundamental problems with the economy.

If the economy hasn’t got it’s fundamentals in order, massive stimulus only warps the equation — but in fairness — it gives the country’s leaders five years to get those fundamentals in order.

Therefore, my prescription for Japan’s ailing economy is ‘take two more arrows and aim for zero deficit within 3 years.’

Prime Minister Shinzo Abe has the credibility and the political energy to get it done. Leaving it for the next Japanese Prime Minister isn’t an option.

Related Articles:

Biofuel ‘Roadmap’ Unveiled by Boeing, Japanese Aviation Industry

Boeing and Japanese aviation working towards low-emission biofuel future. Boeing 787 image courtesy of Boeing
Boeing and Japanese aviation working towards low-emission biofuel future. Boeing 787 image courtesy of Boeing

Boeing is leading local and global collaboration for the complex challenges our world faces now, and looking to the future. We support industry-wide approaches to align on ways to improve the environment. And whether it’s through the development of sustainable aviation biofuel or by working with communities globally on important environmental issues, we’re making a difference.

From working to improve the environmental performance of our products and services to working together for the benefit of our homes and communities, Boeing is building a better planet. — Boeing website

Boeing (NYSE: BA) and Japanese aviation industry stakeholders have charted a course to develop sustainable aviation biofuel for flights during the 2020 Olympic and Paralympic Games in Tokyo, when millions of people are expected to visit Japan.

The Initiatives for Next Generation Aviation Fuels (INAF) – a consortium of 46 organizations including Boeing, ANA… Continue reading Biofuel ‘Roadmap’ Unveiled by Boeing, Japanese Aviation Industry

Japan agrees with ‘All of the Above’ Energy Policy

by John Brian Shannon John Brian Shannon

President Obama’s famous All of the Above energy policy released during his first term and perfected in his second term seems to have gained some attention and perhaps some followers around the world. The latest is Japan, which has decided to embrace more and different types of energy to replace the lost nuclear power capacity since the Fukushima incident.

Prior to the earthquake and tsunami of March 4th, 2011, Japan received 29% of its electricity from its nuclear reactor fleet. Subsequently, many of the country’s 54 nuclear power plants were shut down for inspection and stress testing, and some have been scheduled for complete decommissioning at a total cost of well over $100 billion dollars, but possibly approaching $1 trillion dollars over 50 years if the damaged reactors at the Fukushima-Daiichi nuclear power plant begin acting up and leaking even more than they have. Which could happen.

With almost 30% of their electricity production permanently unavailable or temporarily offline, the ever-industrious Japanese are looking to a better energy policy — one that will not leave them dependent on foreign politics, international trade disputes or shortages. Energy cost is a primary concern.

The good news is that Japan hopes to hit 20% of total electricity demand with renewable energy by 2030.

Japan’s energy choices include solar

Extensive research into solar utility-scale installations and rooftop solar for residential use in Japan have netted some amazing results. Japan ranks fourth among the nations with the most amount of solar capacity installed and continues a massive solar installation campaign. Some 10 Gigawatts of solar are being added to Japan’s grid this year.

Some farmers in Japan are finding that they can make more money with much less toil by turning their rice paddies into solar farms. In other cases, huge blocks of solar panels are mounted on floating pontoons in sheltered bays and lakes.

Japan-Energy-Transition-slide-1
Japan shows a clear preference for solar power, even as it experiments with other renewable energy such as wind, tidal, hydrogen and methane hydrate ice.

Wind energy in Japan

Wind energy is making strides in Japan and the future of that is under discussion. However, Japan feels a need to protect its tourism industry and does not want monstrous turbines cluttering up shoreline tourist areas. Nevertheless, the country is forging ahead with plans for the largest offshore wind farm on the planet in non-tourist regions of the country.

Tidal energy

Japan is a pioneer of tidal energy, with some locations producing power via underwater propellers anchored to the ocean floor via cables allowing them to be suspended in the water near the sea bottom safely away from ships hulls.

Undersea Methane Hydrates

Japan has sent ships to the Arctic ocean in recent years to mine methane hydrate crystals that line the sea floor for hundreds of miles in all directions. It turns out that just off Japan’s coast there is a gold mine of methane “ice” also known as clathrate (more specifically, clathrate hydrate) just sitting there waiting to be picked up. In fact, some successful prototype operations have been reliably producing power in Japan, using only locally-mined clathrate.

It is a clean burning fuel, as methane clathrate hydrate composition is (CH4)4(H2O)23, or 1 mole of methane for every 5.75 moles of water, corresponding to 13.4% methane by weight. There is nothing else to it. No sulfur, no nitrogen, no trace contaminants. Pure fuel mixed with water ice.

“Japan hopes that the test extraction is just the first step in an effort aimed at bringing the fuel into commercial production within the next six years. That’s a far faster timetable than most researchers have foreseen, even though there is wide agreement that the methane hydrates buried beneath the seafloor on continental shelves and under the Arctic permafrost are likely the world’s largest store of carbon-based fuel. The figure often cited, 700,000 trillion cubic feet of methane trapped in hydrates, is a staggering sum that would exceed the energy content of all oil, coal, and other natural gas reserves known on Earth.” – National Geographic

Hydrogen fuel for electrical power production and for vehicles

As a clean burning fuel, hydrogen shows great promise. The only catch with this fuel are the costs associated with splitting ocean water into its constituent molecules, which, after you filter out the salt and any contaminants is; 1 hydrogen atom + 2 oxygen atoms = 1 molecule of water. Using electrolysis to convert vast quantities of water into hydrogen takes a huge amount of electricity, which is fine if it can be had cheaply enough. With the advent of solar power gird-parity, hydrogen production suddenly looks attractive at a large scale.

“Now that Toyota Motor says it will release mass-production fuel-cell vehicles powered by hydrogen, Japan has set an even bigger goal of making hydrogen a main energy source for the nation’s electric utilities. The nation’s first “hydrogen energy white paper,” released Monday, calls on the country to become a “hydrogen economy” by adopting the fuel for utility power generation. The paper was produced by the government-affiliated New Energy and Industrial Technology Development Organization.” – Wall Street Journal

We are at a unique period of human history where doors that were once solidly closed are now opening. Our energy future will be more diverse and cleaner for those nations and corporations that are open-minded enough to see the possibilities of clean and renewable energy.

Although there have been some failures in the business of renewable energy (as in any new field of endeavor) things renewable energy are starting to gain traction and acceptance not only by the public, but by policymakers around the world.

Japan, after initially reeling from the tsunami and Fukushima incident, has profoundly embraced solar and wind power and experimented with the promising tidal energy technology and has advanced clean burning energy solutions such as undersea methane hydrates and hydrogen fuel.

Certainly, fossil fuels have their place and they will be with us for some time to come. However, rather than tying ourselves to One Big Energy source (fossil fuels) an All of the Above approach may turn out to be the best, long-term solution after all.

China Drops Subsidies, still Smashes Solar Records

by John Brian Shannon

China solar power record-setting installations in 2013, were mostly 'Distributed Energy' installations. (Rooftop solar PV)
In 2013, 2014 and 2015 China ramps up solar PV production/installation to unprecedented levels and drives toward unsubsidized, distributed energy solutions.

China surpasses all of its Renewable Energy targets (twice!)

In July of 2013, it was announced that China planned to add an unprecedented 10 GigaWatts (GW) of solar power per year for each of the next three years, (starting from FY 2013) for a grand total of 30 GW over 3 years.

But by October 2013 China’s solar target had been upped to 12 GW — and now in February 2014, while they are still doing the final counting, China’s total installations might well surpass 14 GW for 2013 — and yet another 14GW is planned for 2014 (for a total of 28 GW in only 2 years).

(Prior to China’s aggressive solar installation programme, Germany held the world record at 7.6 GW in 2011)

“The 2013 figures show the astonishing scale of the Chinese market, now the sleeping dragon has awoken.”

“PV is becoming ever cheaper and simpler to install, and China’s government has been as surprised as European governments by how quickly it can be deployed in response to incentives.” — Jenny Chase, head of solar analysis at Bloomberg New Energy Finance.

Distributed Energy leads the charge

Officials from China’s National Energy Administration (NEA) said that two thirds (8GW) of China’s 2014 target would come from the rapidly growing segment known as ‘Distributed Energy’ — installations comprised of small-scale arrays usually mounted on rooftops — or when not mounted on rooftops, are otherwise situated very close to electricity demand centres.

It is interesting to note that strong Chinese (14GW in 2014) and Japanese (7.2GW in 2014) solar PV demand will account for 40-45 percent of all 2014 global installations and that 2/3rds of that is expected to be small-scale, distributed energy.

Almost every week, new distributed energy sites are being announced in countries around the world. This one, announced in October 2013, is a typical installation at 120 MegaWatts in Zhenjiang, China. Click here to read more on that story.

Distributed energy will become the fastest-growing part of the solar market in China, Japan, Thailand and many other countries in 2014. Further, China continues to scale back on subsidies and incentives as the Chinese government increasingly sees solar PV as a mature industry, running near grid-parity in the country and capable of competing without government intervention.

Subsidies for Solar PV to virtually disappear by 2015

The biggest PV news in 2014 will be sustainable and unsubsidized solar power markets.

“With PV costs falling and traditional energy prices rising, there could be some 700 MW of unsubsidized PV announced worldwide.”

“While government subsidies and incentives have traditionally fueled the early growth and adoption of solar power, the recent scaling-back of these policies has left PV increasingly going solo – the signs are good, though, that the market might well be ready to take flight unassisted in 2014.” — PVmagazine.com

The Chinese ‘Year of the Horse’ will happen at full gallop

All in all, 2014 looks set to become a momentous turning point in the global PV industry, especially as Japan and China ramp up production/installation to unprecedented levels and drive towards unsubsidized, distributed energy solutions — and with no shortage of eager customers.

For very different reasons — Japan replacing it’s lost capacity due to the Fukushima meltdown and their citizens’ subsequent turn away from nuclear and China working towards improving their urban air quality — the future for solar PV and distributed energy in the Asia region looks very bright indeed.

See also: