An Idiot's Guide to "Abenomics" , and is it showing signs of working ?

Wednesday 10th June 2015

An Idiot's Guide to "Abenomics" , and is it showing signs of working ?

"How to restore self-belief to the Japanese economy" , Leader, The Financial Times, p.10

Where to start ? Ever since the bursting of a vast real estate bubble at the end of the 1980s, Japan's economy has been mired in a decades-long deflationary slump. Soon after his election (for the second time) in December 2012, Japanese PM Shinzo Abe put in place a radical three-pronged approach in an attempt to finally lift Japan out of the doldrums. Naturally, the plan was dubbed "Abenomics" and the three "spears" of the strategy (as they are known) are :

1.    Fiscal stimulus ..... direct government spending on huge infrastructure projects (roads,,bridges, tunnels etc) and on packages to stimulate private investment.

2.    Monetary easing .....  near-zero interest rates and a massive programme of Quantitative Easing (the largest anywhere and called a "gigantic experiment in monetary policy" by the WSJ) designed to inject liquidity and push inflation to 2.0%

3.    Structural reform ..... the most difficult politically and the most complicated of the measures, entailing slashing business regulations, liberalising the labour market, cutting corporate taxes and increasing workforce diversity.

News this week that annualised GDP is forecast to grow at 3.9% will be most welcome but should be treated with some caution  --  the number was in part boosted by a build-up in inventories. More good news .... the yen has dropped 50% against the dollar in under 3 years to the great benefit of Japanese exporters. Unemployment is low and there are signs of upward wage pressure, but we've seen plenty of false dawns before and for a variety of reasons. Upticks in domestic consumption have in the past been scuppered by increases in VAT designed to help balance government books.

Moves back into an inflationary environment have been reversed by forces outside Japan's control , i.e. falling oil and commodity prices. So, the answer to the question in the title is, I'm afraid ...... the jury is still out.

Huge programmes bring big risks, not least the worry that monetary easing on such a scale might in the long-term bring hyperinflation rather than a gentle and desirable 2.0%. The structural reforms also promise to be a political minefield. But The FT's Leader argues that now is not the time to lose one's bottle ..... if necessary, Japan should increase its stimulus rather than waiver. Only then will it be able to shake off its 25yr torpor.

Well, no one said it was going to be easy.