The Abenomics experience in Japan is on a road to nowhere

Much has been happening in recent times in the Pacific region. Only last week we saw the Chinese add a new feature to the Currency Wars theme as they announced several lower fixings for the value of the Yuan/Renminbi. This will have been noted in the land of the rising sun as Japan has been a playing of this particular game or strategy since the election of Prime Minster Abe. There the policy of Abenomics involves monetary expansion, currency depreciation and economic reforms. The first two “arrows” are of course interlinked and the third is something which is rather doubtful especially when being pursued by someone with such close ties to “old” Japan.

As their currencies cannot simultaneously fall against each other there is an issue as they both try to gain a competitive advantage. Added to this as we look at Japan is the theme of Quantitative Easing as I am reminded of last week’s concept of “To Infinity…and Beyond” as Japan which has been using it on and off since 2003 has been the longest user of it. We have an ominous note here as the name has been changed from QE to QQE rather in the manner that Windscale become Sellafield. If you do not like reality change the name and doge the Google searchers!


The latest Bank of Japan Minutes give us an update of the scale of what is taking place here early in proceedings.

In this situation, the amount outstanding of the monetary base had been in the range of 320-326 trillion yen.

There was a time when such numbers seemed enormous! Also on such a scale let us give them the benefit of the doubt over the 6 trillion gap. I note that the Bank of Japan is keeping the pedal depressed towards the metal.

The monetary base had increased significantly as asset purchases by the Bank had progressed, and the year-on-year rate of growth had been at around 35 percent.

But whilst the communique tries to put a positive front on matters something significant is contained with it.

Many members shared the recognition that quantitative and qualitative monetary easing (QQE) had been exerting its intended effects.

In a place where “face” is an important concept it is no small thing that we seen that there are public expressions of doubt. These doubts are established in the sentence below.

On the other hand, a few members said that the effects of monetary easing on lowering real interest rates were diminishing.

As interest-rates have been effectively zero for quite some years the only change here can be that expectations of inflation have declined. Whilst both readers and I may welcome that this is not the case at the Bank of Japan wedded as it is to aiming for a consumer inflation rate of 2% per annum.

What is inflation?

The numbers for this speak for themselves.

The consumer price index for Ku-area of Tokyo in July 2015 (preliminary) was 102.0 (2010=100), down 0.2% from the previous month, and up 0.2% over the year.

I am using the Tokyo numbers as we get those ahead of the national ones. If we look at last weeks Producer Price numbers we see that in July they fell by 0.2% meaning that the annual rate was -3% driven mostly by a 7.1% fall in import prices. Thus we note that there continues to be downward pressure on consumer inflation from this source.

The oil price fall should be an enormous boon

As it is such a large energy importer Japan may be the country which gains most of all from the fall in the oil price. Last December 1st I described it thus.

A fall in the oil price is likely to be extremely welcome for an economy which imports more than 90% of the energy it uses. The US Energy Information Agency describes it thus.
Japan is the world’s largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer.

So it should be the country which most welcomes the fact that the price of Brent Crude Oil is below US $49 as I type this and that WTI (West Texas Intermediate) is below US $42. Back in December I estimated the gains from the oil price fall on its own.

So in US Dollar terms the daily cost to Japan has fallen from US $506 million to US $317.4 million.

If we bring that up to date the current daily cost is around US $ 225 million giving Japan quite a boost and offsetting the impact of the Fukushima disaster at least in economic terms. On that subject last week saw the first restart of a Japanese nuclear power plant since Fukushima.

Today’s GDP data

This morning Japan’s Cabinet Office informed us that GDP had fallen by 0.4% in the second quarter of 2015 which is often reported as an annualised fall of 1.6%. If look into the detail then CNBC covers it here.

External demand subtracted 0.3 percentage point from GDP growth, while domestic demand erased 0.1 percentage point.

It was not supposed to be that way as monetary easing was supposed to boost domestic demand and the Yen depreciation was supposed to boost exports and trade. Still apparently there was a very familiar culprit.

Most of Japan experiences a rainy season in June, but while that’s an annual occurrence, some reports said there were more rainy days than usual this year.

The government blamed the slow down in China and more intriguingly the United States whilst also presenting rather an odd statement for a body which claoms that inflation is good for Japan.

Amari also noted that a rise in food prices may be discouraging consumers from increasing spending,

If we step back for some perspective then GDP was 0.7% higher than a year ago. But if we look at the overall picture for Abenomics then the clouds reappear as in the second quarter of 2013 GDP was 527 trillion Yen and in the same quarter this yet it was 528.4 trillion Yen. Rather than the promised surge we seem to be seeing this as Talking Heads strike up a tune.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride


It was not supposed to be this way as Japan was supposed to be projected by Abenomics onto a new higher growth plain along the lines of the first quarter which was revised up to a growth rate of 1.1%. However it was preceded by a 2014 where the economy flatlined and has been followed by one where it shrank. Noticeable here is that we begin to escape the initial impact of the rise in the consumption tax.

A big factor has been the behaviour of wages which have struggled. In today’s data there was something a little more hopeful. From the Wall Street Journal.

Employee compensation, or the sum of wages paid to both regular and nonregular workers during the quarter, increased 0.7%.

However one member of the Bank of Japan is not so convinced.

 the rate of increase in bonus payments had decelerated
compared with last year, when it had shown high growth

So we will have to wait and see.

What we do know is that there is dissent at the Bank of Japan with one member voting to reduce the flow of QQE just as the pressure will some from the government for “More,More, More”. So far it has allowed Prime Minister Abe to sing along with the Rolling Stones as it is under his thumb but Abenomics overall is more in tune with this.

I can’t get no satisfaction
I can’t get no satisfaction
‘Cause I try and I try and I try and I try
I can’t get no, I can’t get no

You may note that this is without looking at the important and interrelated issues of demographics and the national debt.


14 thoughts on “The Abenomics experience in Japan is on a road to nowhere

    • Hi Andrew and thanks for the link.

      So we see more QE or in this case QQE reflected in higher assets prices. We know the equity market has surged under Abenomics but I guess the housing market had been in a depression for so long it took a lot longer to turn it round.

      Strangely enough that is missing from the Minutes but we do get a section on housing in general.

      “Housing investment had started to pick up. The number of housing starts — a
      leading indicator of housing investment — had picked up from the start of the year onward, mainly in owner-occupied houses and apartments for rent. Housing investment was projected to pick up with the employment and income situation continuing to improve steadily, supported as well by accommodative financial conditions.”

  1. Hi Shaun

    So much of economic discourse is expressed in money terms – quite understandably. However, to my way of thinking one ultimately has to look at the underlying “real” structures to understand what is happening, albeit dynamically.

    With Japan it seems to me that its efficiency model has been under attack for some years now with the rise of competitors, most notably the Chinese.

    The underlying demographics are also not at all favourable and the country still has a cultural exclusivity which it is determined to preserve, thus effectively ruling out immigration.

    It has an export sector which is still to some degree competitive but a service sector that isn’t and a political structure that seems relatively inert.

    These are major issues which to my mind are amongst the ultimate economic determinants and I cannot see that the printing press is the answer (the same thing applies to the West but, as you imply, the Japanese have been at this game somewhat longer than ourselves). Sooner or later, as here, the “real” Issues will assert themselves and the policy will be seen to be misguided which, as you say, is already happening.

    The Emperor indeed has no clothes; it just takes time for many to admit it.

    • with more people we’re richer ?

      good back of a fag packet shows we can have the density of London rolled out over the SE and East Anglia and get 500 million in

      then we can be like India and Bangladesh

      afterall they have lots of people and are rich……

      oh hang on a mo !

      more immigration is never the answer for us plebs

      take the Black plague , afterwards the peasants got better wages as the TPTB then had to fork out to get anyone to work their lands and so on .

      As for the Japanese , they are restarting their nukes and will soon cut oil and gas imports – then they’ll be back to making money as a country

      Sadly we will not be doing the same


  2. Thank you Shaun.
    Little of the failure of Q(Q)E in Japan gets reported in the MSM, so I am grateful for the knowledge I have picked up on this matter and others from your blog.
    Like so many other aspects of Western economic policy, the question is begged, “If it didn’t work there, why should it work here?”
    It is my (rather cynical, I’m afraid) belief that TPTB know, full-well that much of their economic policy is not going to fulfil its stated aims, but will be effective for purposes they dare not announce.
    It is not my belief that TPTB are so stupid as to follow, lemming-like, unsuccessful policy.
    So if you look at interest rate policy, QE etc. from the perspective of the “need” for continued bank-bailouts, rather than stated aims.
    If you look at austerity as a method of redistributing wealth upwards, rather than limiting budget deficits and government debt, which are only recent buzzwords, as no-one gave a monkey’s whilst we were heading towards these totals.
    No. The powers that be are not stupid: they are liars.

    • Yes indeed, it never ceases to amaze me that the vast majority of people simply cannot see the wood for the trees no matter how much you explain what is really occurring….generally they believe you are a conspiracy theorists…well actually that’s true because TPTB are bloody clever, continually unveiling almost plausible arguments but most importantly always maintaining a greater fear I.e. Immigrants, undeserving poor, Russians, ISIS whatever!,,

    • TPTB know QE/ZIRP doesn’t work,as any half independent analysis of Japan over the last 25 years would show.
      The problem is that the alternatives are unpalatable to them,mainly because middle class voters wouldn’t stomach deflation in the residential housing market.

      Martin Armstrong wrote an interesting piece the other day about the Fed needing to raise rates to reignite economic growth.

      The only other place I’d seen it mentioned was in the comments on this ere blog.

      • I think the elephant in the room is now far too large and TPTB will be powerless to stop what I think will be an economic reset.

    • Hi Benfitzg

      One problem with the haircut strategy for Japan is that most of the national debt is owned by the Japanese. The Asian Review reported this in February.

      “Overseas investors’ holdings of Japanese government bonds set a new record high for the first time in seven years, topping 46 trillion yen ($383 billion) at the end of 2014.”

      The trouble is that is nowhere near enough to make a material difference and it is a long way short of the Bank of Japan’s 298.2 trillion and rising as of August 10th. I would not put it past the Japanese to think of a way of only haircutting gaijin but there seems to be little point.

      • If they just do a huge devaluation is this not a boomer haircut? They have savings but cannot earn more. Just devalue, let inflation rip and hey presto you have a reduction in living standards. Wages adjust and the young cash in.

        • I know some people will say they tried to create inflation but have failed. If they need help I can sort it for them. I’ll get wage inflation going.

  3. Shaun,
    A couple of questions.
    1)I presume the BoE is still sat on the full £375bn from it’s QE programme.
    2) What proportion of JGB’s does the BoJ own?

    If you have the time.Great interview on the beeb the other day by the way.Nice to hear a cautious voice asking the right questions for a change.You got your points across quickly and succinctly.Good job.

    • Hi Dutch

      1). Yes and we are about to do an Operation Twist style rollover/extension of it.

      “As set out in the MPC’s announcement of 6 August, the MPC has agreed to make £16.9bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2015 of a gilt owned by the Asset Purchase Facility (APF).”

      2) Last November Reuters crunched some numbers and decided it owned around 24% of the JGB market. The WSJ put it another way.

      “Even before the decision, the Bank of Japan’s asset holdings were nearing 60% the size of Japan’s economy, well over twice the relative levels reached by the Fed and the Bank of England.”

      As to the interview thank you and as they had asked me various times before but then not put me on it was nice to actually do it.

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