TOKYO – Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings, and hire employees; at other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending, and reduce risk. They either stimulate our “animal spirits” or muffle them.
Visiting Japan on a speaking tour, I am struck by the positive impact of the economy-related stories on people’s thinking and behavior, and also by how fragile that change is. Since Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound. According to the International Monetary Fund, the output gap – the difference between actual and potential GDP – narrowed from -3.6% in 2011 to -0.9% in 2013.
Most of the rest of the world lacks a comprehensive, easily understood narrative of positive change similar to Japan’s “Abenomics.” The output gap for the world’s major advanced economies, as calculated by the IMF, remains disappointing, at -3.2% in 2013, which is less than half-way back to normal from 2009, the worst year of the global financial crisis, when the gap was -5.3%.
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