Abenomics’ predictable failure

When it was announced that in Q4 2015 Japan’s GDP was shrinking by a whopping 1.4% on an annualised basis it confirmed that the land of the rising sun is still sinking, as it has been since the 1980ies. The Japanese are panicking, and in a desperate move the Bank of Japan lowered its main policy rate below zero. But they must know that it is futile. The Abenomics project has predictably failed, just as the previous 20 years of catastrophic policies has brought no growth to the Japanese economy.

Shinzo Abe’s Abenomics was somehow supposed to finally end decades of zero growth, but it is merely magnifying the failed policies of the past. It is important to understand that the mainstream explanation for Japan’s “lost decade” of the 1990ies is the failure of the Bank of Japan to provide sufficient monetary stimulus, resulting in deflation which killed economic growth. Contractionary fiscal policies are highlighted as “policy errors” (a favourite is the 1997 VAT hike from 3% to 5%), but somehow it is ignored that monetary stimulus was well under way in the lead up to the crash. In fact, interest rates were lowered through the 80ies, from 9% all the way down to 2.5%, and when they were rapidly increased towards the end of the decade cheap money had already fuelled a stock market and property boom. The bubble burst in 1990, the Nikkei crashed by almost 50%, property prices tumbled and banks had their balance sheets destroyed. The Japanese reacted predictably: interest rates were lowered again, by 1994 the discount rate was 50bps and it has not been higher since. Banks were bailed out, losses were socialised and the zombie banks were kept alive. A massive economic stimulus program was undertaken.

Of course it was a disaster, and by 2012 Japanese GDP was barely higher than 20 years previously. This is when Abenomics was undertaken, launched to great fanfare but consisting of nothing more than an increased dose of the medicine which Japan had been choking on for decades. There are tree “arrows” of Abenomics (an analogy to an old Japanese folk tale of a man who can break one arrow, but can’t break three): The monetary arrow is an expansion of the money supply to combat deflation, the fiscal arrow consists of increased government spending to stimulate demand in the economy, and the structural arrow promised reforms to make the economy more productive and competitive. Sounds familiar?

Speaking of sounding familiar: the Japanese have been going full throttle on implementing the first two arrows, but failed to make much headway with structural reform. It turns out once again that doing stuff voters don’t understand, which can be done by stealth, or financed by debt, is much easier than implementing changes that have direct effects on people’s everyday life and finances.

At the very core of Abenomics is the vast expansion of the money supply. In April 2013, the BoJ announced its quantitative easing program, whereby it would buy ¥60 to ¥70 trillion of bonds a year, and in October 2014 it was increased to ¥80 trillion. But as 2015 has shown the economy is stubbornly mired in sub-zero growth, hence the decision from Central Bank Governor Haruhiko Kuroda to take interest rates negative. The move has less to do with domestic stimulus, but is a deliberate attempt at manipulating the currency. After having fallen since 2012, in 2015 the Yen’s fortunes were reversed and it started rising against all its major trading partners. The BoJ knows that the Japanese economy won’t generate the demand their Keynesian models require to drag the economy back from the dead, so a debasement of the currency must be undertaken to stimulate foreign demand. In the process, they would de facto be making the Japanese poorer. It is a desperate move by disciples of a failed economic doctrine, who stubbornly refuse to admit defeat and re-examine their options. So far, it isn’t working either; the Yen has refused to tank.

As for the second arrow, fiscal stimulus is also at an end game. Japan government debt to GDP ratio is the highest in the world, at an astronomical 230%. Paradoxically, at the same time Japan is the largest creditor nation in the world. In fact, the silver lining for the bankrupt Japanese government is that most of its debt is held by domestic investors, who can be taxed, though unfortunately the ability to stealthily do it via price inflation seems not to be working. But the private sector is also lending abroad, and as far as domestic lending goes, with zombie banks lending to zombie companies the money is hardly invested productively.

So it is not looking good for Japan, in fact the outlook today is remarkably similar to… well, what the outlook has been for decades: recession, with no end in sight. It is well known that it is a sign of stupidity to try the same thing over and over and expect a different result. But the genius of Abenomics was supposed to be that while the same policies had a record of decades of demonstrable failure, it had never been tried as on a scale like this. Now it has been tried, and it turns out that scale is not the problem. It is the basic economics which are wrong.

Add Comment

Required fields are marked *. Your email address will not be published.