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What next for Abenomics and the Bank of Japan?

What next for Abenomics and the Bank of Japan? Shaun Richards

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This week has been a significant one for those who are following the story of the efforts of Prime Minister Shinzo Abe and his efforts to pull Japan out of the economic malaise represented by the phrase "lost decades". His plan on being elected, in December 2012, was to apply what has become called Abenomics to the Japanese economy. The three "arrows" of Abenomics are described below:

1. An expansionary monetary policy being deployed by the Bank of Japan
2. An expansionary fiscal policy being deployed by the Japanese government.
3. A program of reform to de-ossify the Japanese business sector and to encourage a more entrepreneurial spirit.

How has this been applied?

The first step actually began a couple of months before the election of Shinzo Abe's government, with the value of the Japanese Yen beginning to fall as expectations of his victory grew. Thus, the Yen fell from a value of 78 to the US Dollar in October to 102 by May 2013. It subsequently fell lower still, but has now returned to the 102 level as I write this article. Added to this, the Bank of Japan decided on a massive expansion in the money supply as highlighted below:

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.

The fall in the value of the Yen and the increase in the money supply had this as an objective:

The Bank set the "price stability target" at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) in January 2013, and has made a commitment to achieving this target at the earliest possible time.

If we review what has happened here, we see that the Bank of Japan can raise the money supply and the Yen did fall - although it has now got stuck at 102 to the US Dollar. In response, consumer inflation has risen to an annual rate of 1.6% in December - which may not seem much, but it is a significant change for Japan. However, Japanese consumers will not be welcoming the fact that food prices are rising at an annual rate of 2.2% or that energy and water costs are rising at 5.5%.

The second arrow out of the quiver was more problematic as Japan was already set on a path of fiscal deficits. So, the policy here is a somewhat contradictory one. Yes, there has been a push in this direction, but in April the consumption tax will rise from 5% to 8% to help bring the fiscal deficit down. Rather like Euro area and UK austerity that one, is it not? The background to this issue is the size of the national debt which, according to the IMF, will reach some 242% of Gross Domestic Product this year. Accordingly, this area was always likely to turn out to be something of a chimera.

The third arrow of reform was also always going to hit difficulties. After all, Shinzo Abe himself is part of the Japanese establishment that has resisted such moves in the past. So far, there seems to be little more than empty promises. The economic growth figures for the last quarter of 2013, which were released on Monday, were a disappointment to say the least. From the Financial Times:

Gross domestic product increased by 0.3 per cent in the October-December quarter, or 1.0 per cent in annualized terms, according to a preliminary estimate by the Cabinet Office.

A flash in the pan? Well, two of them, as economic growth was the same in the third quarter of 2013. If we look into the detail of the numbers, we see that import growth at 3.5% way exceeded the export growth of 0.4%. That is part of the road that saw Japan set a record trade deficit in 2013.

I doubt that this was what was meant by "making a break with the past".


Back on the 20th of June last year, I wrote an article for this blog suggesting that it was not going to be as simple as many of the supporters of Abenomics have implied. Press the monetary expansion button and soon after you get economic growth, was the mantra. But, as you can see, the last two quarters of 2013 disappointed in terms of outcome and there is another reason to have doubts going forwards.

It was supposed to be the case that wages picked up as inflation did. However, in a theme that will be familiar to readers from many parts of the world reading this, real wages have in fact been falling. Nineteen months and counting is the score so far. Accordingly, when I pointed out earlier that Japanese consumers will not be enjoying Abenomics so far, we can now add workers to that list. Both groups will no doubt be wondering when - and perhaps if - they will see any gains, and this matters because they will need to be full partners of the policy for it to work at all.

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Tags: Abenomics , Bank of Japan , fiscal deficit , GDP , IMF , International Monetary Fund , Japan , lost decades , money supply , price stability target , Shinzo Abe , yen
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