A Failing Scheme
Our idea that the Nikkei writes the news remains uncontested by any contrary developments. It still does. Since its peak at 16320 points on the final trading day of 2013, the Nikkei has lost 14.7% – and so it is no wonder that the ‘miracle of Abenomics’ continues to get the bad press it so richly deserves.
Note that it would be deserving of bad press even if the Nikkei index had not declined, but the ups and downs of the index seem to be in control of the public view of ‘Abenomics’ and what the media report about it.
The Nikkei has declined by about 14.7% since its late 2013 peak. Over this period of time, doubt about ‘Abenomics’ has increased – click to enlarge.
The theory behind Abenomics is as hoary as it is misguided. Allegedly, Japan has been in a long lasting economic stagnation due to ‘deflation’ - meaning, in this case, not a decline in the money supply (that never happened), but the occasional, barely noticeable decline in consumer prices. Note that these minuscule declines in consumer prices have occurred in what is widely acknowledged to be one the most expensive places in the world. Until it was topped by Singapore in 2014, Tokyo has been regularly taking the top spot as the world’s most expensive city. The main reason why it is considered ‘cheaper’ nowadays is the slide in the yen’s exchange rate – but that has actually made it even more expensive for the Japanese. Only, now Japanese citizens will find other cities also very expensive, as they are forced to use a cheapened yen if they want to visit them.
If printing more money and pushing prices higher are what it takes to magically ‘create economic growth’, one must wonder why emperor Diocletian’s coin clipping scheme and John Law’s Mississippi bubble failed. Why hasn’t even asingle one inflationary scheme that has been tried in the course of history succeeded?
The answer should be obvious: printing money cannot create real savings or capital. This does not mean that it has no economic effects, and initially, these effects often appear to be positive, as a boom is usually set into motion. Everybody feels good, as asset prices rise and economic activity seems to revive. But the boom is always built on quicksand. It creates no real wealth: scarce capital will be malinvested and ultimately consumed.
Inflation is Actually Not ‘Helping’ Anyone in Japan
Japan is facing a demographic problem. Its population is declining and aging rapidly. More and more people need to rely on their savings to make ends meet. Unemployment meanwhile is very low, as the active labor force is shrinking. It is not immediately obvious which problem Abenomics was supposed to ‘solve’. Only one conclusion makes sense: the government is trying to reduce the burden of its own debt in an attempt to ‘inflate it away’.
This means however that the inflationary push is mainly meant to act like a tax on everyone in Japan. The government might as well have raised taxes outright. Here is a recent Bloomberg report confirming that this is exactly how it feels for Japan’s citizens, although the report contains the usual canards about ‘Japan’s 15 years of deflation’ and the alleged ‘benefits’ of replacing it with monetary debasement.
“Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.
Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg.
The challenge for Abe and the Bank of Japan is to keep the public focused on the long-term benefits of exiting deflation when wages are yet to pick up and, according to BOJ board member Sayuri Shirai, most people still see price gains as “unfavorable.” Any jump in inflation that’s perceived as excessive by a population more used to prices falling could worsen consumer confidence and make it harder to boost growth.
“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position.”
