Two years on both Abenomics and QQE are developing a track record of failure

Yesterday I discussed the way that the Greek economy was struggling under the mountain of debt which ironically is described as a rescue package. Well I suppose for French and German banks it was. Today I wish to move onto another country with an enormous public-sector debt burden and that is the land of the rising sun or Nippon. This now amounts to 1.053 quadrillion Yen for central government as of the end of March according to the Ministry of Finance. However Japan retains control over its monetary policy and exchange rate in a way that Greece does not in that it sets its own interest-rate and has its own currency. In a way that is something more honoured in the breach than the observance because if you look at it both the Euro area and Japan have very low interest-rates and both are implementing Quantitative Easing to drive their currencies lower. In one way the Euro area has gone further as it has negative interest-rates which rather intriguingly Japan has consistently resisted.

Number Crunching the debt

The rather extraordinary number for Japan’s national debt if anything gets even worse if we compare it to Japan’s tax revenue which was 50.000 billion Yen or to put it another way Japan would take over 20 years to pay it off if all revenues were used solely for that purpose. That of course would assume that no interest was payable whereas in fact last year it estimates that it paid 23,270 billion Yen on Debt servicing. So if we allow for that we see that it would take well over 30 years to pay off the debt on current tax revenues.

Then we get another problem which is that Japan is still borrowing on a grand scale as expenditure is expected to be 96,342 billion Yen this fiscal year but revenues only 54,525 billion as the cycle goes on. So not only is the situation mind-boggling if you start putting the zeroes on these numbers as they fill the whole page line but you realise that each year it is as Paul Simon put it.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

What about economic growth?

We await next week’s update but if we recall the promises of the economic and monetary policy being applied in Japan they certainly did not include this. From the IMF.

In Japan, after a weak second half of the year, growth in 2014 was close to zero, reflecting weak consumption and plummeting residential investment.

Now we get to the crux of the problem as economic growth was derailed by the rise in the Consumption Tax last year such that it turned out to be appropriate that it commenced on April Fools Day! Also on the scale of things even if we take the revenue from the total Consumption Tax which is expected to be 17,112 billion Yen you see the scale of the problem. Compared to its expenditures Japan is very under-taxed but when it tries to raise higher taxes the economy splutters.

Time is Running Out

A year ticking by means that Japan runs its deficit and raises its national debt. This might not matter if it was genuinely about to turn a corner in economic growth terms. I will discuss the near future in a moment but if we look further ahead we see the implications of this. The problem is that Japan’s population is shrinking and on the latest estimates that is happening fast as between November last and this April the population fell by 391,000 to 126,691,000. Also it is aging as the proportion of people over 65 rose from 26% to 26.4% over the same period.

I spoke to the Pink Shoe Club (female entrepeneurs) at the House of Lords last night and the subject of care of the elderly came up. Well the Japanese make a much better job of it than we do and for the individuals concerned greater longevity is welcome. But if you project that onto an economy that needs to be dynamic and innovative you see the problem. It has fewer people who on average are getting older. Also Japanese society is quite homogenous and resistant to immigration so that route is closed for now at least.

Consumer Price Inflation

According to the philosophy of Abenomics the cure for this is a good dose of inflation involving a fall in the value of the Yen. A compliant Governor of the Bank of Japan Mr. Kuroda was installed to do this so to bring things right up to date he would have looked at today’s producer price index numbers with dismay as they showed an annual rate of -2.1%. As he spoke earlier today at the Yomiuri International Economic Society  let me use his words.

The last time I addressed this meeting, in April 2013, was immediately after the Bank of Japan’s introduction of Quantitative and Qualitative Monetary Easing (QQE). Two years have passed since then, and the economic and price situation has improved substantially under QQE.

You may note quite a bit of hype here so let me concentrate on inflation alone which is now supposed to be running at an annual rate of 2%.

Although the year-on-year rate of increase in the consumer price index (CPI) had declined, due mainly to the effects of the substantial decline in crude oil prices since last summer, and recently has been about 0 percent, the underlying trend in inflation has steadily been improving

So if you ignore the actual numbers things are going very well?! Some of you may have spotted that QE in Japan has become QQE which can be thought of as why Windscale changed its name to Sellafield. Failure needs a fresh start at least in terms of a name. Indeed after a complex passage we do get a confession of sorts.

That said, when trying to express such expectations in terms of numeric figures, a single figure cannot be easily found…

Ah so things are really good but I cannot put it into numbers (because they do not back this up). We do however get an estimate of what the Bank of Japan thinks it has done.

the policy effects of QQE are such that they are roughly equivalent to those that would arise from making almost ten 0.25 percent cuts in short-term interest rates in one shot under conventional monetary policy.

So it thinks that its policies are equivalent to cutting interest-rates to  below -2% and perhaps to -2.5%.

But then we get to the crux of Kuroda’s problem which is why I have emphasised this bit.

While the decline in crude oil prices exerts positive effects on Japan’s economy……..a favorable environment of inexpensive crude oil prices.

Thus we see exactly the opposite of official policy boosting the economy. If only I was there to ask if higher inflation boosts the economy and lower inflation also boosts it why Japan had a “lost decade” as all it has to do is avoid zero inflation?

You might like to recall at this point that Japans’ economy did not grow at all in 2014 as you probably will not pick that up from these quotes.

Looking ahead, Japan’s economy is expected to continue its recovery trend

Despite these unexpected events, the mechanism of QQE has been operating as intended.


In a nutshell you could say that Japan’s establishment has stuck its collective head in the sand one more time. Yet right now it should be receiving an extraordinary boost via the fall in oil prices and indeed other commodities. This is a subject I have discussed before and the Wall Street Journal added to it yesterday by pointing out it imports more than 90% of its fossil fuels. Of course this lack of natural resources is also the road to Pearl Harbour and how it got into world war two. But the economic point is that its economy should be leaping forwards right now but instead it has an economic policy called Abenomics which is trying to push prices higher.

If we look at real wages I note the number of references in rising wages in Governor Kuroda’s speech. Except real wages fell by 2.6% in the year to March which means that they have fallen in every month of the two years of QQE now. On that road the policy looks very familiar does it not? Pretty much everywhere real wages are struggling and government policy is invariably to push them lower whilst proclaiming the opposite. Two years on the only record is one of failure. Or as the Japan Times puts it.

Now that economic growth has plateaued, Hirayama says such life cycles have become a thing of the past, with an estimated 36.6 percent of those under 35 now plagued by hiseiki, or irregular employment.

Having raised the issue of world war two it is hard to avoid noticing this from the Japan Times.

Prime Minister Shinzo Abe tried to brush off concerns Thursday that Japan could be dragged into a war involving the United States, saying the envisioned security legislation would enable the Self-Defense Forces to address every situation in a seamless manner to protect Japanese citizens.

As has been pointed out before those “helicopter destroyers” look awfully like aircraft carriers. What could go wrong?


8 thoughts on “Two years on both Abenomics and QQE are developing a track record of failure

  1. Hi Shaun
    Their demographics and isolationism mean that only robotics can ultimately save their society. We must all hope it can, otherwise a devastating conflict with China is the only other likely outcome given the national characteristics. How the US ( and therefore the UK) could stay out of that is difficult to conjecture. Together with ‘herr’ Putins desire to reunify Russian speakers, this is a far more significant potential powder keg than islamists in the deserts.

    • Hi JW

      I would say that we are engaged with the Islamicists in the desert because we can but of course we keep losing there! Although as we have now been on pretty much every side in Syria no doubt there will be cries of victory whatever happens. It also reminds me of the “desert power” of Duke Leto in Dune.

      Returning to Japan things are often very different there as this from the Japan Times indicates.

      “Government approves 8.36% price hike for Kepco

      The government on Friday approved hiking electricity rates for Kansai Electric Power Co.’s household subscribers by an average of 8.36 percent, effective June 1.

      Kansai Electric will, however, limit the hikes to 4.62 percent on average for the first four months to lessen the burden on customers during the summer, when air conditioners cause electricity bills to swell.”

      Energy price rises? Well I suppose they do pay in Yen terms……

  2. Hello Shaun,

    I can assure you that more people > ” resistant to immigration” is not a long term answer

    if so why dont we adopt the entire Indian population? ( because they too will get old ! )
    ( the Japanese will not adopt the Chinese – take a look at the history there!! )

    The issue is they have touted inflation as be the answer and failed to get it … why? because QE and QQE is not for the likes of you and me – follow the money as they say

    Also touted that growth is the answer – again not a long term solution either and apparently not much of a short term one these days but the figures can always be adjusted to show any growth you like …..

    the effect of allowing unfettered globalisation has been to reduce the spending power of the middle classes both in Japan, USA and Europe by allowing unfair ( that is unbalance costs ) competition from other countries that could not give a fig about western values , and even despise them.

    lower spending power mean lower tax intake and less money for all ( and again who has actually gained? follow the money )

    Still gotta laff , the soaps are on and footy looks good ….


    PS: oil prices have increase 40% since January , you would have expected some hoo-hah over that but nowt been seen

    • Is protectionism of Japanese manufacturing and farming jobs good ???

      Only if you are a cosseted Japanese farmer or manufacturing worker. For many many others including Japanese consumers who pay over the odds for food, poverty stricken third world farmers who get blocked from free trade, hyper efficient New Zealand farmers who get blocked from trade.

      IHMO the Japanese trade barriers hurt foreigners unfairly and they hurt more Japanese citizens than they benefit.

      PS protectionism makes popcorn more expensive in Tokyo !

  3. The Japanese govt is bankrolled by it’s own elderly. Project this long term and question how it might pan out.

    Maybe stealth default by inflation. Maybe real taxation from death duties. But we shouldn’t expect a currency collapse caused by foreign lenders taking flight. On this basis yen looks pretty solvent, despite Abenomics ….

    • Hi ExpatnBG

      If we compare Japan with Greece one of the major differences is that Japan has in essence borrowed from its own people. A default is therefore quite a different animal and pretty much self-defeating.

      Abenomics is another form of stealth default as you say but it makes the Japanese poorer. Whilst Abenomics welcomes the domestic energy price rises I put a link to in my reply to JW the Japanese consumer certainly will not.

      Japanese society however is holding together so I agree that rather than a collapse it will let the water level will slowly rise and rise….

  4. Hi Shaun

    Your analysis is very perceptive as usual but it is framed from an “occidental” standpoint.

    Culturally it is very difficult for the Japanese to accept error – even if they genuinely believe it to be error – which they may not ; after all when the Japanese had lost the war in a devastating manner Emperor Hirohito termed it (and I paraphrase but only slightly) that”the situation with respect to the war had developed not necessarily to the advantage of Japan”. Japan is still a very insular culture.

    Like you I don’t believe these shenanigans can ever work and are doomed to failure but maybe the Japanese psyche prefers a crisis as an opportunity for national renewal rather than the sort of preemptive adjustments that we in the more decadent West would adopt, Actually, I can see their point of view.

    • Hi Bob J

      I take your point. When I worked out there I soon came to realise that the Japanese for yes (Hai) also means “maybe” much more often than we do but also means ” I am saying yes for politeness and face reasons but I actually mean no” fairly often. I am not so sure how well they understand the implications of this as I believe that sort of culture is why they have had so many problems with their nuclear power stations.

      However of course their approach does have strengths as you point out…

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