Abenomics does not address the economic problems facing Japan

At the moment Japan must be looking at the UK with some bemusement. That is because it has been a country with political instability with a merry-go-round of Prime Ministers and yet an axis has shifted. We are now in a type of flux whereas Prime Minister Shinzo Abe has been in power since November 2012. This means that his economics policy of Abenomics has had a decent run in terms of time and yet again we see someone who has taken the Matrix style blue pill and declared it a success. Let me hand you over to Matt O’Brien of the Washington Post.

Its unemployment rate has fallen to a 22-year low of 2.8 percent — yes, you read that right — due in large part to all the yen it has created the past four years.

The former which we have looked at before is a success and it is the flip side of this.

Maybe the best way to tell isn’t its super-low unemployment rate, but rather its super-high employment rate. That, as you can see below, has shot up since the start of Abenomics to an all-time high of 83.5 percent, making our own 78.3  ( He means the US ) percent rate look downright measly in comparison.

Again a success in itself as the quantity measures in the labour market are as strong as anywhere. But then we get an enormous leap of what I can only call faith.

It can’t be the fiscal or structural parts of Abenomics, because they’ve barely been tried……..All their money-printing seems to have given businesses the confidence — and the cheaper currency — they needed to expand a little more.

Thus we see a conclusion that the money printing has led to higher employment. Some would argue that with a fiscal deficit of 4.8% of GDP in 2015 and 4.5% last year with a debt to GDP ratio that fiscal stimulus had been tried rather a lot. Also there seems to be any lack of a causal relationship as the phrase “seems to have” suggests. Let us finish with some hyperbole.

And all it would have taken was printing a few trillion yen, which actually isn’t that high a price to pay.

Numbers may not be a strength for Matt as we remind ourselves of this from the 6th of this month.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets,

Taking the red pill

Dissent in Japan is mostly considered to be non-Japanese so this from the Nikkei Asian Review ( NAR ) is interesting. First the ground is described.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013,

Okay so what has happened since then?

But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

If we return to the case made by Matt O’Brien above the fact that estimates of the potential growth rate have fallen seems to be missing doesn’t it? That is awkward for business supposedly being more confident in response to a promise to print money to infinity and maybe beyond. The tectonic plates on which supporters of QE stand would be on their own Ring of Fire if there are further suggestions that it reduces potential economic growth. I have been a critic of QE style policies and note that this below suggests yet another problem with the claimed transmission mechanism.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

The NAR seems to agree with me about the trajectory of fiscal policy as well.

In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

Also the NAR fires a lot of criticism at the so-called third arrow of Abenomics which is reform in Japan.

The debate on compensation for unfairly dismissed employees has stalled. While Tokyo opened the door for foreign workers with exceptional skills or those in certain sectors such as cleaning, it has shied away from a comprehensive discussion on immigration. Momentum to tackle regulatory barriers is fading.

It points out that if Abe wished to reform the labour market politically he is in what might be called a “strong and stable” position due to the way his party the LDP controls both the upper and lower houses in parliament.

The economy

There was some disappointment last week as the economic growth figures for the first quarter took a downwards revision.

The expansion in real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, was revised to an annualized 1.0 percent growth from the previously estimated 2.2 percent expansion, the Cabinet Office said. ( The Japan Times ).

The good part of that was that it meant that Japan had grown for five quarters in a row which it had not done for over a decade. There were two bad parts though in that as well as being in the economic growth dog kennel with the UK there was an implication for the Abenomics plan of boosting inflation to 2% per annum.

In  nominal terms, or unadjusted for price changes, the economy shrank an annualized 1.2 percent, the biggest contraction since 2.2 percent registered in the July-September period of 2012.

Also the period of Abenomics was supposed to see a rise in inflation and more particularly a rise in wages. As the Japan Times reminds us the labour market is tight.

Moreover, there were 148 job positions open for every 100 people looking for work, the highest ratio in 43 years.

But wage growth is at best anemic.

But the labor ministry reported that in 2016, wages across the board — regardless of whether we’re talking full-time or part-time employment, regular or nonregular employees — only rose by 0.4 percent

Why? Well as we observe in some many countries official definitions of being in a job miss changes in the real world.

a larger portion of the workforce is in part-time and non regular jobs, which traditionally pay less.


There have been some extraordinary claims made for the success of monetary easing and QE. In my opinion we see a clear divorce between the financial and real economy. If we look at the financial economy in the era of Abenomics we see booming equity markets ( the Nikkei 225 has risen from 9000 or so to ~20,000), a lower currency ( versus the US Dollar it has gone from 80 to 110) and booming bond markets with a ten-year yield of 0%. But the real economy has not seen the boom in wages promised nor any great turn in the rate of GDP growth. Ironically it has been the recent fall in inflation that seems to have given GDP an upwards push rather than the claimed surge to 2% per annum.

Meanwhile the real challenge is adapting to this.

The annual number of babies born in Japan slipped below 1 million in 2016 for the first time since records began, with the estimated figure for the year coming in at 981,000, according to government figures. ( Japan Times)

The reminds us of the demographic changes underway highlighted by the fact that the figures for the 6 months to May showed the population falling by another 245,000. Exactly how will QE fix those?






14 thoughts on “Abenomics does not address the economic problems facing Japan

  1. I dont think anyone can increase the population by asking women to have more babies

    never stops anyone trying – this link is in Italian….


    the gist is clear

    the Romans had the same issue apparently

    but less people doesn’t mean a smaller economy , hence the drive to robots and AI

    Here in the West we are trying to import people ok fair enough , but I have noticed 2nd and 3rd generations are deciding not to have children ( in the majority we’re talking ) so that’s not the solution either in the long run .

    So QE fixes all but actually fixes nothing ?

    true I guess , just a delaying tactic , so long as it blows up on the other man’s shift ….


    • Hi Forbin

      The mind boggles with fertility day and Abenomics has seen similar efforts but they have had only a minor impact. As to QE yes it is just another way of kicking that poor battered can forwards in time.

  2. These numbers are so large as to defy comprehension. Am I right in thinking that 500 trillion yen is nearly $5 trillion? I thought that it must be “only” $500 billion as my calculator doesn’t have enough noughts…isn’t that about $40,000 per Japanese citizen, or have I got my numbers wrong?
    Anyway, it does seem extraordinary that you can have:
    1. 83% employment
    2. 2.8% unemployment
    3. 148 vacancies for every 100 job seekers and yet
    4. No wage growth.

    Notwithstanding all of your negative commentary on QE (with which I agree), I still see the biggest problem is how you stop or reverse it, given the temptation by every politician to keep the plates spinning for just one more electoral cycle.

    • It’s Japan, the bumblebee of the economic world, “a riddle wrapped in a mystery inside an enigma” and all that.

  3. Great blog as always, Shaun.
    It seems that Matt O’Brien thinks the higher the employment rate the better. Now that the Japanese unemployment rate is about as low as it can possibly be, presumably any future increases in the employment rate will be driven by increases in the participation rate. The only way that Japanese society can approach the ideal is by its students dropping out of schools to work, and old people enjoying a well-deserved retirement to go back to the labour force. It’s ridiculous really.
    In the 2015 election campaign, a so-called factchecker found fault with PM Harper’s math when Harper bragged, quite correctly, that Canada had had the highest rate of job creation of any G7 country since the 2008-09 recession, as the estimates of TD economist Randall Bartlett confirmed. Andy Blatchford thought this was wrong because our employment rate over the period was in fourth place, the median for the G7 countries. Whatever the merits of Blatchord’s belief that the higher the employment rate the better, this had nothing to do with factchecking.

    • Hi Andrew and thank you

      Actually using the retired as part of the work force has already been mooted in Japan. Thanks for your link where my eyes alighted on the labour market numbers for another regular topic of mine the Girlfriend in a Coma Italy. In each of the measures it was the bottom of the pack.

      Returning to employment in itself we have these days to ask at what wage?

  4. As Forbin mentioned, I am not sure that robotics etc. has been taken into account. Even if we only see a fraction of what is promised it will have an impact on jobs. I am not sure just importing people is the answer nowadays.
    When visited Japan a number of years ago they seemed to employ a vast amount of people to do jobs like directing taxis into hotels. maybe they could re-deploy these people into more useful jobs.

    • Hi Bez

      It was over 20 years ago that I worked in Tokyo but the situation was the same. For example I worked in the Ark Mori building down the hill from Roppongi Crossing and next to it was a 3 level highway. If you walked across the elevated crossing you were counted by people sitting there. The lifts in the shops in the Ghinza district had attendants and so on. …

      • My favourite non-job was, when I was in Leningrad, as it then was, there was a woman (always a woman for some reason) at the bottom of every escalator in the underground. Her job was to shout at you to put your hand back on the handrail if you took it off.

  5. I read an article quite a while back that stated that if the Japanese Central bank kept following it’s trajectory, they would end up being the major stockholders of the countries largest companies, which if true strikes me as a strange form of Capitalism. I suppose that all sorts of strange effects are likely as I think I am right in believing that they are sailing into uncharted waters, while presumably hoping for the best that the world they now inhabit is not flat & they & the rest of us wont fall off the edge.
    I also read somewhere of something that makes the Japanese economy different to the EU & US, which meant that they can sustain the policy longer. It might have been to do with the amount of savings stashed away, but then again due to my increasingly fuzzy memory it might not. As for us in Europe, I think the Archaic Greeks had a very good word for it – Stasis.

    • Hi Stevie

      I covered the topic of the Bank of Japan only last week in fact.

      “The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.

      The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013.”

  6. Hi Shaun, on a more general level you speak of the real economy and the financial economy/markets being divorced as if this is a new phenomenon yet it has been my observation over the last 30 years or so that markets can shoot forward or collapse whilst the real economy is either moving in the opposite direction, directionless or moving in the same direction.

    In the past I have ascribed it to the price mechanism over which we argued a while ago catching up with reality. Japan is an excellent case in point – little in the way of dividends paid by Japanese companies which could be used to provide a reasonable clue as to value yet the market has shot forward, you say due to QE yet the BOJ holdings are not yet great enough to shape the market and if market participants disagree with prices being pushed up they simply sell. This hasn’t happened, even if the BOJ owned the entire market then the price is the price albeit set by one market maker, whether it is too low or high is impossible to tell (in financial markets especially in the new lower for longer climate in which we live – the real economy is different but even that may be manipulated by one participant buying all food at one price and then selling it on at losses printing money to make up any shortfall, but the fact they do that does not make the price they determine “correct” or “incorrect”),

    Who is to say, in the absence of dividend payments, that the rally over the last few years has been the price mechanism at work resetting values to what they should have been years earlier and that the low values of years ago were in fact too low and only now are being corrected? You could of course make the converse argument (yours) but can you now see the hopelessness of using price as any kind of benchmark assessment to determine value?

    • Hi Noo2

      There is a lot in what you say and let me be clear that running up to the credit crunch there were problems in economics with the concept of equilibrium. This was needed for economic models but fell apart and plainly many prices were what would now be regarded as wrong.

      However I am not someone who believes that central bankers have any great skill at knowing where a price should be. Also in my opinion they have moved some of them a great deal. For example many bond markets. Of course we do not know where they would be but many of the metric for looking at a bond market such as inflation have been abandoned. As we have discussed before the pattern for foreign exchange is complex as there is an initial response to QE which then seems to stop.

      So in conclusion saying prices were perfect was plainly foolish but I think that markets flawed though they are do give clues.

  7. I believe Japan has a population of about 125 millions. They may be better off with a smaller population; so why worry about a drop in the birthrate for fifty years or so? If they do want more babies then substantial government support for single mothers and significant subsidies to families with children will always do the trick. Basically people always respond to fiscal incentives; the question is always to what extent does the community wish to pay. In the UK we think, mistakenly, that immigration is cheaper I do not believe that the Japanese will make the same mistake. Regards Charles

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