Abenomics hits the rails

[unhappycamper]

http://atimes.com/atimes/Global_Economy/GECON-01-180314.html



Abenomics hits the rails
Martin Hutchinson
Mar 18, '14

Since November 2012, the world has been watching for the outcome of Japan's experiment in "Abenomics," a bold policy experiment that attempted to put the country on a faster growth track. The results are now coming in, and on balance, the experiment appears to be failing. That's not very surprising - one of its central planks rested on false Keynesian nostrums. However, the result won't be pretty, and is likely to lead to a deep global recession starting within the next two years.

Abenomics consist of three interlinked policies, the combination of which is supposed to revive the Japanese economy. The first is a massive monetary "stimulus," with Japan Government Bond (JGB) purchases of some 7 trillion yen (about US$70 billion) per month, about three times the size in terms of the Japanese economy as Ben Bernanke's QE3 program at its greatest. This was supposed to revive the economy generally and, more particularly, to weaken the yen against the dollar. The second is a program of fiscal "stimulus," the latest supposed to offset the deflationary effect of a 3% rise in consumption tax to 8%, to be introduced in May 2014. The third was a program of reforms and opening up of Japanese institutions and trade restrictions, which together would increase output, as well as making the Japanese economy more competitive.

The monetary stimulus has more or less worked as intended. The yen has fallen from 80 to the dollar before the program started to 102 to the dollar today. Inflation is running at 1.4% in the last 12 months, well on the way to the Bank of Japan's target of 2%. The economy has recovered into moderate growth. Yet possibly because of the BOJ's bond purchases, the yield on the 10-year JGB has fallen slightly, to 0.65%, well below the rate of inflation.

The fiscal stimulus hasn't worked so well, partly because it was ineffably foolish to begin with. Japan has a huge public debt problem, with government debt about 240% of GDP. That is close to the highest level ever brought down (250% of GDP by Britain in 1815 and 1945, the first time legitimately, the second time through debauching the currency as discussed further below.)