Both Japan and Abenomics are in crisis as the country returns to recession

This morning has seen some disturbing news from the Far East. This came as rather a contradiction to the promises of the G20 conference which had only just ended in Brisbane.

The combined growth strategies of G20 member nations presented at the Brisbane Leaders’ Summit will equate to 2.1 per cent new growth and inject an additional $2 trillion into the world economy and create millions of jobs.

The Brisbane Action Plan contains close to 1,000 measures, including more than 800 new ones, which the IMF and OECD estimate will boost the collective GDP of G20 nations by 2.1 per cent by 2018.

I suspect that many of those promises will be forgotten on the flights home.

The news flow took a darker turn as the latest economic growth figures for Japan were released. From the Financial Times.

July-September data defies consensus, contracts again: July-September real GDP shrank by 1.6% qoq (quarter on quarter) annualized, defying market consensus for growth (+2.1%), as GDP (Gross Domestic Product) remained negative following the April-June print (-7.3% qoq annualized, revised downward from -7.1%).

Just to be clear that was a 0.4% fall as we usually measure GDP in the UK and it followed on from a quarter where the economy had shrunk by 1.9%. So we see that the Japanese economy has in fact not only returned to recession but has in fact faced a sharp one. This in itself poses more than a few questions for the official policy of Abenomics in Japan of which more later although of course regular readers will be aware that I have challenged it from its inception. If we go back to the 30th of October 2012 here were my thoughts.

I always felt that rather than conclude that the policy is a disappointment they would instead conclude that what had happened was that it had not been applied with enough size and vigour……….So in spite of the grand declaration of a “Measures Aimed at Overcoming Deflation” by the Japanese government and the Bank of Japan I expect there to be a QE10,11,12….. as time goes by.

This caught the “experts” somewhat by surprise as the Financial Times highlights.

those atrocious GDP forecasts in full: Credit Suisse: +3.4pc Morgan Stanley: +2.8 Bank of America: +2.5 Barclays: +2.2 JPMorgan: +2 Banque Nationale Paris: +1.6

As you can see up is indeed the new down one more time!

Perhaps they have spent too much time reading Paul Krugman in the New York Times who has been a cheerleader for Abenomics since its inception. He added this in April 2013.

I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness.

Also Paul Krugman was kind enough in that article to confirm that for him you can never “Pump It Up” enough.

The hope now is that things have changed enough at the Bank of Japan that this time it can, as I put it all those years ago, “credibly promise to be irresponsible”.


What about QE 11?

Some nuance is needed here as whilst events have progressed as I argued and Mr.Krugman has seen the Bank of Japan “credibly promise to be (even more) irresponsible” as QE 11 was announced by the Bank of Japan on the 31st of October the latest move came after the quarter in discussion here.

The problem that is fiscal policy

If you think  that Japan has a problem with monetary policy wait until we get to fiscal policy! Not only does Japan have a very high level of gross government debt (245% of GDP) but it is also running a relatively large annual fiscal deficit (7% of GDP in 2014 according to the Cabinet Office). As you can see real problems are posed here by the size of the numbers. For example 24% of all Japanese government expenditure is projected to go on debt costs this year and that is in spite of what are extraordinarily low government bond yields. Or if you prefer debt costs are 43% of all government revenue. Japan’s official debt measure excludes some of what is counted elsewhere but  even so it is some 17.5 times the expected central government revenue this year (Cabinet Office figures).

If we look further ahead in time then there are clear challenges for fiscal policy from Japan’s population which is both ageing and shrinking. Of all the countries in the world Japan is suffering from the most severe case of this with regular falls in its population combined with a low birth-rate and a rising life expectancy. Please do not misunderstand me in most respects the latter is welcome. But in the world of what is sometimes called the dismal science it poses plenty of challenges right now.

Even with the fiscal consolidation measures planned Japan expects to run a fiscal deficit of around 5% per annum in the future as the forecasts go to 2023. Of course we are left wondering if the phrase “Too infinity  and beyond!” applies?

Actually those forecasts assume measures which now are much less likely to take place such as the second phase of the planned consumption tax rises.

Speaking of the consumption  tax increase

This has become something of an elephant in the room as I have been involved in a debate this morning as to whether this was part of Abenomics at all. I agree with this from the Japan Times from  the 13th of June 2013.

The Abe administration appears inclined to raise the consumption tax from April 2014.


Whilst the bill was in   existence pre the Shinzo Abe government it is a bit much  to argue that a “revolutionary” economic policy could not have changed course on this if it wanted! Also I note that like the Bank of Japan the Japan Times was very concerned about  the historical precedents from past consumption tax rises.

The Finance Ministry had expected that the tax hike would increase total tax revenues, thus contributing to the government’s financial reconstruction. What happened was the opposite. Although consumption tax revenues went up, total tax revenues fell because the tax raise broke the back of the economic recovery.


It would appear from the evidence so far that history can indeed repeat itself. Back on the 17th of December 2012 I pointed out that Abenomics arrow number two or fiscal expansionism would have to face up to the issue of what to do about the consumption tax.

If the LDP spends more and delays or ends the planned rise in the sales tax rate then the national debt will rise even faster.


I suppose those at the more fanatical end of Abenomics support with argue that Shinzo Abe “bottled it”.


There is much to consider here but let me start  with the forecasting community. They have had yet another bad day as estimates of growth of the order of 0.5% turned into a -0.4% reading. Actually that is pretty much the history of Abenomics which has received an extremely favourable press with some news organisations willing to misrepresent wage patterns. The reality is as I put it on the 20th of October that Japan is stuck between a rock and a hard place.

Of course the story is not yet over (although if an election is called and Shinzo Abe loses it presumably would be…). My main measure involves looking at wage growth. As of the latest figures released earlier this month real wages were falling at an annual rate of 2.9% in Japan. Exactly how will the economy improve with this being the state of play?Also as higher inflation is official policy and as the numbers indicate the often promised wages fairy has not turned up in Japan how will the promised higher inflation help with this? Perhaps in an example of another definition from my financial lexicon for these times help is now defined as a hindrance.

In musical terms Japan is singing along with Coldplay.

Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,

Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,





17 thoughts on “Both Japan and Abenomics are in crisis as the country returns to recession

  1. Another backward step into the corner, debt payments rising even with super-low rates, the malaise of deflationary expectations driving consumer purchases. Soon, that debt can they’re kicking down the track will be heavier than Thor’s hammer. Had Cameron got wind of this dip prior to his all-aboard-to-Gloomsville quotes to the Guardian this morning, or does he know something else that’s wicked, coming this way? Definite wobble in the UK housing market as winter sets in, and that must be a big driver for our ersatz recovery. Will we get a new set of desperate incentives to borrow in the weeks to come? Or is it grin and bear it time – not to mention the last 5 years?

    • Hi Peter

      Even at the ultra low level of Japanese bond yields (10 year is 0.48%) the annual burden is an issue. Here is a debating question whilst the low levels of yield are helping Japan are they storing up trouble by allowing the government to be profligate?

      As to the UK we have discussed on here for a while that the housing boom was peaking and likely to be dipping for the election. I guess someone has pointed that out to the Prime Minister.

      • Spot on – and witness how the house price cosh is being wielded in Rochester and Strood, with voters being warned that prices will tank with a UKIP victory. Tremulous times for the Tories.

  2. Shaun,
    If Japan unable to attain real wage growth (with limited workforce etc) what hope for UK as imports from Eurozone increase and our exports to them falter? Sterling crisis our only solution?

    • The Japanese thing is more about Japanese culture, they start cutting wages of workers over 50 and as the population is ageing….I believe the English thing is about growth in low skilled/value jobs which can easily be done by new arrival immigrants, thereby suppressing wage levels although I think there is some upwards pressure in higher skill jobs now.

  3. Hi Shaun,
    Presumably, Krugenomics does not see inflation as an end in itself, but as a means to achieve a self-sustaining process of real GDP growth.

    To bring such a process about, Mr Abe needs to persuade Japanese companies that it is worthwhile to invest because there will be a market for their products.

    Given that Japan’s population is falling and getting older, I see only three ways that could come about:
    1 Mass immigration. Not one of the three arrows, I believe.
    2. Big increase in exports. Good luck with that.
    3. Persuade ageing Japanese citizens to spend rather than save. I don’t live in Japan, but my guess is the net effect of Krugenomics is actually to increase people’s feelings of insecurity. I’m ready to be told by those who have knowledge of current Japan that my guess is wrong.

    • Hi Ian

      Krugmanomics is a little confused on inflation. After all how does simply raising prices make you better off? I think that he is hoping to reduce the debt burden and also hoping that some of the price rises will be recorded as economic growth.

      As to your 3 points. Japan is about as homogenous a nation as there is and so point one would struggle. Exports are up but by nowhere near enough. That leaves persuading them to spend which is not going so well….

  4. Great article as always.

    Surely Abe is not trying hard enough. A quick swish of the wand and GDP can be tinkered to include the ‘black economy’. Another swish, and HPI could take off on an island whose resources are more limited than the uk.

    Seriously though, and endgame has been on the cards for the last twenty years, and it still hasn’t happened? Is this because the Japanese population are large buyers of their debt? Also if they hard vast amounts of debt, could this be an easy way to default?


    • Hi Anteos and thank you

      The GDP improvements implemented in the UK and Europe this year are due in Japan in 2016 (under a different banner SNA 08). So the cavalry may be along to help the debt/GDP ratio although explaining the drugs & prostitution link to the conservative Japanese will take a little doing! As to house prices Andrew Baldwin regularly updates us on the indices where there have been some signs of recovery but of course there are two decades to recover.

      That is a good question. Have they in some way caused it by investing in their own national debt and sucked demand out of the economy? If so the clamour for QE in the Euro area will cause and not solve the problem.

      Default for Japan has the problem that they are in effect defaulting on themselves as foreign JGB (Japanese Government Bond) holdings remain relatively low. If you think about it the rest of the world could find itself making a dreadful mistake if it bought JGBs en masse.

  5. Hi Shaun,
    It’s the modern way. You can’t raise interest rates, you can’t cut your deficit by increasing taxes. It’s truly shocking that 43% of government expenditure is sucked into the debt ‘vortex’. There surely can be no way out of this. No wonder the Japanese are holding on to their yen-if I lived there I would be severely worried too.

  6. Great column, Shaun. You saw the perils of Abenomics when others didn’t.

    You may be aware that the Bank of Canada is one of the forecasters who didn’t see this coming. In its July Monetary Policy Report (the BoC equivalent to the Bank of England’s Inflation Report) it predicted the Japanese economy would grow by 1.3% in 2014. With the second quarter drop in real GDP it was forced to revise that to 0,8% in its October MPR. Even this much lower growth forecast is almost certain to be too high. The Japanese economy would have to rebound with something like a 2.5% increase in the fourth quarter, if my calculations are right, to achieve this, and that’s not likely to happen. Oddly enough, although the Bank of Canada didn’t really engage in QE during and after the Great Recession, its policy staff are in love with QE and can’t say enough good things about it, Therefore it is not so surprising that they would be rosy in their predictions for Japanese growth under Abenomics.

    • Hi Andrew and thank you

      Apologies if you got the wrong reply, there appears to be a ghost in the machine tonight.

      It is a little awkward for a central bank to implicitly criticise another so we will not find out if the Bank of Canada forecasters were wrong or whether they were “leaned on”. As to being fans of QE well if commodity prices continue to be weak or even dip further perhaps it will come on the agenda in Canada.

  7. hello Shaun,

    Some more signs I see then of the next round of recession to hit the world, Japan could of course do something else other than repeat the last 20 years of failed policy

    I think Einstein once said that madness is repeatitly doing something you know doesnt work !

    I do hope they start their re-actors soon , they really cant afford even the lower gas prices although I ‘m sure lower oil and gas will help them and the RoW . However its lower because of demand destruction , the LTO plays have helped but they will take 18 months or so to wind down at these lower prices – I think this will happen as the World economy marks upwards around then and that will lead to another high spike , followed by , you’ve guessed it , recession …….

    For the time being expect more bad news (!)

    The other posters have touched on the issue , the poor and middle classes need more spare cash , not the rich …… but the rich are locked into a super games with the supa rich and they are locked into games with the hyper rich ….. all wanting more pie the world economy is not providing.

    Kool eh ?


    • Hi Forbin

      That leaves you in the company of none other than our Prime Minister who appears to have suddenly realised that his boomlet may well fade before the election.

      As to the energy situation in Japan I have two thoughts. Firstly for an advanced nation they have had a lot of nuclear scares making me think that their culture is not suited to running them. The oil price falls will benefit Japan a lot so as we move into 2015 perhaps there will be a boost from them.

      As to the super-rich it continues to be a case of heads they win and tales we lose.

  8. Hello Shaun – how do you see things playing out? Clearly 43% and growing of government revenues is unsustainable, so what could occur other than default, perhaps with some ritual hari-kari by the cabinet after announcing the move?

    Also, I’d be interested in knowing other countries debt costs as a percentage of revenue, rather than gross debt as a % of GDP as the first measure is rather more understandable to the average person – perhaps why we never see it reported.

    • Hi Vellem and welcome to my part of the blogosphere.

      The default argument for Japan is something of a damned if they do and damned if they don’t position as they would be defaulting on their own population.

      As I compile future blogs I will look at the national debt to revenue numbers, although one of the issues for Japan is how lightly it is taxed in some respects as after all VAT in Europe is ~20% and yet going to 8% in Japan has caused a problem.

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