What is the word for spending 3% of output on stimulus but only generating 2% growth over nearly three years? Abenomics.
A central bank can print money, as Japan is learning, but it can’t print babies or loosen immigration controls.
Japan’s output slid into negative territory again in the April–June quarter, contracting at a 1.6% annualised clip. Private consumption fell, no surprise given that real wages have increased only sporadically.
One more quarter of economic contraction, a development not currently forecast by most economists, and Japan will suffer its fifth recession since 2008.
Bad luck too that this is happening just as less-than-chummy neighbour China is seeing its own economy splutter and experimenting with allowing its currency to fall in value.
Since its rise with the advent of Prime Minister Shinzo Abe in December 2012, Abenomics, a combination of fiscal stimulus, radical monetary policy and economic reform, has proved itself good at doing some things, mostly in financial markets, but less good at others, such as in the real economy.
Abenomics, an all-out attempt to break Japan from the grip of malaise, has very effectively driven corporate profits and the stock market higher, at the same time the value of the yen lower, the latter phenomenon driving the former.
Yet all of this has not created the virtuous circle of investment, spiking exports and rising wages its architects expected.
“In case this situation continues, the government and the Bank of Japan’s strong commitment to achieve its 2% inflation target will be open to question. If the market and corporates become disappointed, economic sentiment will deteriorate and there will be no driving force to propel an exit from deflation,” Societe Generale economists Takuji Aida and Kiyoko Katahira wrote in a note to clients.
It is questionable if there is such a force now. Given the up-and-down performance of Japan’s economy despite massive stimulus, there is a genuine question of what more can be done.
Public sector debt is close to three times as large as annual output, interest rates have no room to fall and the BOJ is buying bonds faster than the government is issuing them.
There is some brave talk about further stimulus from the Abe government, especially if the economy remains in contraction in the current quarter. What is less clear is why what hasn’t worked so well thus far will begin to work in the future.
You can’t print babies (yet)
While a cheaper yen has been a boon to Japanese exporters, it isn’t one they’ve assumed would persist indefinitely. That’s led to an expansion of corporate profit margins rather than a huge round of investment in new capacity and the hiring and wage growth that was supposed to come alongside.
Recurring pre-tax profit margins among Japanese corporations have touched 5% in recent quarters, an all-time high. To be fair, profitability has also improved at domestically focused companies, so the trend is partly due to a welcome emphasis on margins in corporate Japan.
What Japan hasn’t got, and what the Bank of Japan wouldn’t even pretend to control, is a surge in births, much less in immigration, to help counterbalance its shrinking population. It is very difficult, perhaps impossible, for a country to grow and escape deflation when it is experiencing an ageing population in long-term decline.
That line of thinking inevitably leads to doubts about debt sustainability, and also argues for the willingness of the BOJ to expand its monetary efforts. The alternative is too dire.
Japan’s problems are not simply of its own making. Exports have been hit by falling demand in the US and China. A Monday report that manufacturing in New York state contracted in August, and at the fastest pace since 2009, is a reminder that the benefits of a cheap yen depend on a vibrant global economy to which to sell goods.
China’s financial market gyrations give similar pause, particularly the move to allow the yuan to depreciate. If this is part of an ongoing campaign to try to win more exports for hard-hit Chinese companies, Japan is one of the main neighbours which will be hit.
The choices facing Abe and the BOJ are not easy. More yen depreciation cuts both ways. It may only further fatten profits at corporations without increasing the volume of exports. A weaker yen will also raise the price of imported goods and may make consumers less willing to spend.
Demographics are the real story, and other than encouraging more women to work, little is being done to help.
Japan, a country which is taking children’s restaurant meals out of the basket of goods to measure inflation, replacing them with hearing aids, is not addressing the fundamental issues.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)
