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Home > Blogs > Shaun Richards > Abenomics and the Japanese economy are both struggling

Abenomics and the Japanese economy are both struggling

Abenomics and the Japanese economy are both struggling Shaun Richards

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The largest economics experiment of the credit crunch era is being carried out by the government of Shinzo Abe with the help of the Bank of Japan under the banner of what has become called Abenomics. Back on February 26, I detailed the three arrows of this policy; and earlier this week, we received an update from the Bank of Japan on the monetary stimulus arrow:

"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 numbers themselves give an idea of the scale of this operation by being in the trillions. But, in economic terms, an idea of proportion can be gained by stating that the intention is to double the monetary base over two years and that they are now more than halfway to such a target. The main mechanism for this is what is known as quantitative easing (QE) where the Bank of Japan buys debt (bonds) issued by the Japanese government and in return supplies Japanese Yen. The name has been modified however to "Quantitative and Qualitative Monetary Easing" or "QQE", presumably, to distinguish it from past QE failures for the Bank of Japan! Yes a couple of bells and whistles have been added but the major difference is the scale or size of the operation.

How are things going?

I have pointed out on this blog before that the hopes and dreams of the central planners are not coming true. So today, let me add to this with the words of the Bank of Japan itself from its economic activity report for April:

"Comparing the current projections with the previous ones, while the growth rate for fiscal 2014 is somewhat lower, due mainly to a delay in export recovery, the projected rates of increase in prices are more or less unchanged."

I do not know about you, but I regard weaker growth prospects with the same level of inflation as making things worse and not better! I also do not share the new enthusiasm of the Bank of Japan for higher rates of inflation. In addition, Wednesday's announcement that the US economy only grew at an annualized rate of 0.1% in the first quarter of 2014 will leave the Bank of Japan crossing its fingers for export prospects there and hoping that "the recent weakness in exports" ends.

The consumption tax rise

This rose from 5% to 8% on the April 1, which has led more than a few to cogitate on the wisdom of making such a move on April Fools Day. Even the Bank of Japan agrees that this is affecting domestic demand right now:

"In fiscal 2014, the growth rate for the April-June quarter is expected to temporarily decline,mainly in private consumption, including durable goods."

As money is being taken out of the pockets of Japanese consumers, the danger is that such an indirect tax rise has a deflationary effect - as we have seen in much of Europe in recent years and we saw in the past in Japan itself. In response to this, the Bank of Japan tells us that it is hopeful about the path for wages:

"Upward pressure on wages and prices due to the tightening of supply and demand conditions is likely to steadily increase. For example, a rise in the inflation rate has been taken into account in the recent labor-management wage negotiations."

What is wage growth doing?

If we move from the hype of the Bank of Japan to reality, we see a rather different situation. As of the latest numbers (March), real or inflation-adjusted wages had fallen on average by 1.3% over the preceding year. Yes, wages had stopped falling compared to a year before - but of course inflation has risen in Japan leaving workers worse off by another route! They will be struggling to see any improvement here for the simple reason that there has not been one so far.

What about other prospects?

The April survey of businesses was not optimistic:

"Japanese manufacturing firms saw a decline in output for the first time in 14 months in April [...] Output fell to the greatest extent seen since December 2012 [...] Alongside the falls in output and new orders was also a reduction in new export business."


The promises from the Japanese government, and from economists who have supported this policy, are wearing ever more thin - and the evidence does not back them up. I fear for what will happen next in the Japanese economy and the consequences for its people.

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Tags: Abenomics , Economy , export , inflation , Japan , real wages , Shinzo Abe
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