Why if stimulus is the medicine for Japan’s economy does it always need more?

One of the earliest subjects of this blog was Japan and its economic travails. Later I moved onto the subject of Abenomics where the government of Shinzo Abe planned to end deflation via a fiscal stimulus but mainly through monetary stimulus on a grand scale. I was always dubious about whether that would work especially on the subject of the third arrow which was supposed to be economic reform as Shinzo Abe is a representative of old Japan and his previous government had been guilty of what is called “pork barrel” politics. Such a view made me stand out as elsewhere they was a lot of cheerleading and claims of likely and in some cases near certain success,If we go back to October 2013 then Paul Krugman told us this.

And it has been an unambiguous good thing for the Japanese economy………..The answer is, Abenomics, which has successfully, at least for now, convinced investors that the Bank of Japan has changed its spots and will keep the pedal to the metal for a long time even after moderate inflation sets in.

My critique of such arguments was based on two main themes. The first was that Japanese society had adjusted over the “lost decade(s)” period to low inflation and indeed low wage growth and it was going to be much more difficult than argued to change that. Also that I was unconvinced that more stimulus would be a magic wand as Japan had seen various efforts on this front each of which had fizzled out in disappointment. In fact even the current claimed saviour helicopter money had been tried and then abandoned in failure. Or to put it another way we were on around QE 13 even then.

Thus I predicted that we would see this from Andrea True Connection being played on the loudspeakers at the Bank of Japan.

More, more, more
How do you like it?
How do you like it?
How do you like it?

We have seen two main phases of this. The first was to expand the Quantitative Easing effort by expanding both the amount and type of the purchases. This meant that the Bank of Japan bought equities via Exchange Traded Funds and commercial property via Real Estate Investment Trusts or what are called J-REITS. Back on the 25 th of April I covered this issue as what is now known as The Tokyo Whale is eating its way through the ETF market. It does not make it easy to track down the purchases in its accounts but it look as though another 800 billion Yen have been purchased since then. Next was the move into negative interest-rates back in January as an official interest-rate of -0.1% was declared.

In case you are wondering what the next section means for you well central bankers are dedicated followers of fashion and what happens in Japan is seen later elsewhere. Time for The Soca Boys.

Follow the leader, leader, leader
Follow the leader
Follow the leader, leader, leader
Follow the leader
Follow Me!

Japan gears up for more Abenomics

Over the weekend the position of Shinzo Abe and his government was strengthened by his election victory so the ground was tilled for even more. Speculation on this front was boosted by a visitor to the Japanese government and central bank. From the Nikkei Asian Review.

Former Federal Reserve Chairman Ben Bernanke on Tuesday urged Japan’s Prime Minister Shinzo Abe to keep pushing to decisively defeat deflation, according to an adviser to Mr. Abe.

A lot of eyes will have alighted on this bit in particular.

The adviser left it vague whether Messrs. Abe and Bernanke discussed a radical step involving a central bank directly financing government spending—a measure known as “helicopter money” that Mr. Bernanke has advocated.

So we are back on the more,more,more road except we did get an excerpt worthy of the science fiction fantasy program The Outer Limits.

At a face-to-face meeting, Mr. Bernanke said Mr. Abe’s growth measures have worked well so far,

Eh! Why is he there then? Anyway we were also told this.

that Abenomics “will work even better if we add fiscal spending” to it, according to Mr. Hamada. Mr. Abe is widely expected to compile a large-scale fiscal package in the autumn that his aides and officials say will likely top Y10 trillion.

Reuters have weighed in with this.

Japanese Economy Minister Nobuteru Ishihara said on Tuesday the government may issue construction bonds to fund a planned stimulus package to revive a flagging economy.

Ah so “worked well so far” is now a “flagging economy” is it?

Japanese Government Bonds (JGBs)

I would like readers to remember that one of the ways that Abenomics was supposed to work was via holders of JGBs losing money. Even back then JGB yields were such that any achievement of the 2% inflation target would leave then losing money in real terms. Now the Nikkei Asian Review tells us this.

Investors are buying medium-term JGBs in expectation of further easing from the BOJ at its policy board meeting at the end of July in response to weaker inflation data and a stronger yen.

The consequence of them front-running the Bank of Japan in terms of market prices are seen below.

In particular, medium-term instruments like two-year and five-year bonds are attracting significant numbers of investors. The two-year JGB yield fell to a record low of minus 0.365% on July 8, while the five-year yield sank to minus 0.375% on Friday, also an all-time low.

What has taken place is that bondholders have made large nominal gains which have not been eroded by inflation at all as the official measure of consumer inflation in Japan is around 0%. Now whilst I do not expect Paul Krugman to have forecast the fall in the oil price in this area we see exactly the reverse of his road to claimed success.

Financial Markets

They think that a change is in the offing. For example the Japanese equity market has surged this week pushing above 16,000 on the Nikkei 225. But the main change has been seen in the value of the Yen which has weakened considerably and as I type this is at 103.75 versus the US Dollar. So something is expected and Rabobank seem to have been the first to push their nose above the parapet in this subject.

The celebration is because in the same way the BoJ repeatedly said it would not increase stimulus, then did so, and repeatedly said it would not cut interest rates to negative, then did so, the market now suspects we are on the cusp of ‘helicopter money’ in the near future: if so, that’s obviously negative for JPY and hence positive for equities.


The central point her is that what we are getting is more of the same and the need for it reminds us that what we have had so far has not worked, in spite of the claims to the contrary. We have another signal of this in the way that QE became QQE (Quantiative and Qualitative Easing ) in Japan in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield!

If we return to my medical analogy in the title above then the treatment can only be a palliative and not a cure. We are reminded of the concept of an economic junkie culture.

Ireland GDP

There has been an extraordinary development this morning from the Central Statistics Office. It has announced that GDP (Gross Domestic Product) rose by 21% in the first quarter of 2015 and yes you do read that enormous revision correctly! I have looked at the detail and so far I have spotted that exports have been revised higher by 50%.

Just for clarity this is not a joke, at least not by me. I have written often on the problems created for economic measurement in Ireland by having so many non domiciled companies.


11 thoughts on “Why if stimulus is the medicine for Japan’s economy does it always need more?

  1. Great blog as always, Shaun.

    I looked at the 2016Q1 report myself, and it shows a 6;0% quarterly increase for GNP in 2015Q1 for the chain-linked volume series. This is a very high growth rate in itself, but staggeringly lower than the growth rate in GDP!

    • Hi Andrew

      I could see that much of this was trade and took a look at the Balance of Payments numbers which were released. They showed quite a surge in exports but gave some detail on services exports which was refreshing compared to the UK but then none on goods which was the bigger change 😦

      Later the Irish CSO told us this.

      “There is an increase in the number of new aircraft imports into Ireland for international leasing
      ♦ Corporate restructuring both through imports of individual assets and also reclassifications
      of entire balance sheets in 2015 means that the level of capital assets in Ireland increased
      dramatically compared to 2014.”

      So an aircraft which may never visit Ireland counts as part of the capital stock and boosts GDP because it was originally financed there ( presumably for tax purposes).

  2. ‘helicopter money’ in the near future”

    and nobody blamed ” brexit ” !!

    when will we also get a stimulus check ?, last time the Japanese consumer banked it

    perhaps its time to go radical

    -1% interest rates and $5000 dollars worth of yen each year for the next 5 years………

    That should do something , even it means more popcorn consumption!


    • Hi therrawbuzzin

      Yes I agree it is rather like what Zantac was back in the day for ulcers. Then the 2 Aussie doctors discovered that antibiotics could cure them. After a delay caused by the drug companies who were making a fortune people were able to benefit.

  3. Hi Shaun, I’ve never understood Japan so steer clear of it but what do you feel is the “cure” for Japan?

    • Hi Noo2

      To stop searching for a “cure” and leave things alone. If we look at the individual position such as per capita GDP the situation is okay . Collectively the issue is of a declining population and an increasing national debt but of course all these failed growth efforts just make the debt worse. Perhaps the worlds first post/slow growth economy or at least the first to admit it.

      As mankind is intermittently rather clever someone may come up with a technology leap to solve it . That seems vastly more likely to me than a solution via ever more “stimulus”.

    • Japan spend more than they collect in tax. Luckily this deficit is financed by domestic savers making Japan less vulnerable to foreign lenders.

      So Japan should spend less and/or tax more. Even putting hefty death tax on savings/bonds might collect lots.

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