I liked the following recent articles on Japan.
- Japan returns to 1997 - idiocy rules! by Bill Mitchell.
- The land of the setting sun - Frances Coppola, Pieria (h/t Roger Sparks).
- Why is Anyone Surprise that Abenomics Failed? - Yves Smith.
I wrote about Abenomics almost exactly a year ago in "Abenomics: Lift-off or Faceplant?". I had not completely ruled out the possibility of Abenomics working, as it was unclear whether the government would have the ability to get companies to raise wages. It is clear that they did not. Additionally, the possibility of Japan riding behind global growth momentum was always possible; absent a crisis, the tendency for capitalist economies is to grow. That hope was dashed by too-tight passive fiscal policy settings elsewhere. But the "New Keynesian" belief that monetary policies (that is, Quantitative Easing) would be dominant was always a pipe dream.
But it would not be fair to say that Abenomics was a failure; it seems to me that it accomplished non-disclosed objectives.
- By stampeding domestic investors into foreign currency assets, the yen was weakened, increasing the competitiveness of Japanese businesses, and pushing consumers towards substituting domestic goods and services for more-expensive foreign ones.
- Increasing foreign currency asset holdings creates a backstop against future currency crises.
- Putting the economy into recession by taxing consumption is one of the most effective ways to push a trade balance towards surplus.
- A higher rate on the consumption tax means that fiscal policy will tighten faster if domestic inflation actually appeared. This should reduce worries about the inflationary risk posed by a large overhang of financial assets in an economy where the work force is shrinking.
Of course, these policy objectives are mercantilist and do not help improve the standard of living of Japanese citizens. But given the history of Japanese policymaking, it is unclear that raising the standard of living is their highest priority.
(c) Brian Romanchuk 2014