Too soon to call time on Abenomics

 
Shinzo Abe

After the market euphoria which followed his election, it was inevitable that Shinzo Abe would hit a rough patch.

But today's export numbers and other encouraging signs from the real economy suggest that his radical approach is working about as well as anyone might have expected, given the enormous obstacles in its path.

Will he finally lift Japan out of its deflationary malaise? There are plenty of reasons to worry that he will not - the best being that he has not yet shown he can confront the deeper structural forces holding the economy back.

He will have an opportunity to confront the doubters in the City when Mr Abe speaks at the Guildhall in London later today. But it really is too soon to say he has failed.

Mr Abe can hardly welcome the 20% fall in the stock market in the past few weeks, and sharp jump in the value of the yen. But there's a lot of market "noise" in these movements. The global financial markets lately have not exactly been a calm and tranquil place.

The yen is still about 20% weaker, on a trade-weighted basis, than it was last year. And only part of the massive run-up in the stock market has been reversed. Even in dollar terms, the Japanese stock market is roughly 20% above its low of October 2012. In domestic currency it is 50% higher.

Higher long-term interest rates (bond yields) are not a disaster in themselves, if they reflect higher expectations for growth and future inflation. After all, Abe's plan to boost economic growth relies on persuading the Japanese people that the things they want to buy are going to get more expensive over the next few years, not fall in price, as they have so often in the past 20 years.

If that is to happen, it is crucial that the Bank of Japan remains committed to get inflation up to 2% by pumping money into the economy like there's no tomorrow.

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Today's numbers provide some limited evidence that Japan is starting to import some much-needed demand from the rest of the world”

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Investors apparently now doubt that commitment, because the bank failed to loosen policy even further, in response to the market ructions. But that feels like an overreaction, on the basis of a single month's meeting.

If inflation and growth are higher, then long term interest rates (bond yields) should be higher as well. But it is important, in the short term, that yields do not rise faster than expectations of inflation. Abe needs real interest rates to be low - ideally, negative - if he is finally to encourage companies to stop saving and start investing.

Today's export numbers provide some limited evidence that one part of the strategy is working, and that Japan is starting to import some much-needed demand from the rest of the world.

But, as Jamie Dannhauser at Lombard Street Research points out, the real test of Abe's policy will be what happens to spending Japanese households and firms.

Real private final demand grew at an annualised rate of 2.9% in the first three months of the year. That is an encouraging start. Also encouraging are reports of rising demand for household loans. That suggests people are really starting to believe that assets will be worth more in a few years' time than they are now.

Graphic

The old guard at the Bank of Japan used to say that deflation would not end until Japan's political class had woken up to the need for structural change in the way the economy worked. It used to say the central bank could support this process, but it could not lead it.

Shinzo Abe has turned that logic on its head. With his new Bank of Japan governor, Haruhika Kuroda, he has made the central bank the "prime mover" in Japan, at a time when the US and Europe are also expecting the world of their central banks. That may not be all that Japan needs, but it is a start.

Back in December, I said that the world was likely to learn a lot from Shinzo Abe's efforts to revive Japan. That may be even more true today.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this
    +1

    Comment number 32.

    Export based economies can only go so far, after a while costs increase and industry moves to find cheaper labor and less regulation. Japan had to restructure to a more internalized economy but wasn't prepared for this transition.

    China seems to be headed down the same road, unfortunately for Japan they can't simply fix the value of the Yen vs dollar to keep exports up.

  • rate this
    +1

    Comment number 31.

    After todays 600 point drop in the Hang Seng Index, and signs of the massive China housing bubble bursting along with a degraded growth forecast China's economic troubles might make the past US housing crises and EU austerity issues seem like small problems. Is China headed towards a Japanese style Deflationary period as manufacturers move industry to other countries with cheaper labor costs?

  • rate this
    +1

    Comment number 30.

    SAGAMIX & ANDYC555 , what HM treasury did as a result was spend a lot of time money trying to hit WORKING CLASS CONTRACTORS like myself , and not the real issues that needed addressing in 1998 such as BANKS and How they pay bonuses etc to avoid TAX/NI., which is on an industrial scale. Ie His FOCUS was WRONG.

    Look at HODGE/STEMCOR and the BBC for tax avoidance?

  • rate this
    +2

    Comment number 29.

    #28 totally agree a run of poor article and also not much analysis/challenge when Laobur was in power.

    Wonder if SF is freelance to BBC or an employee and her TAX and NI status as a result. Perhaps SF could do an article on how much BBC "Staff" have avoided TAX/NI since 1997 along with HODGE and STEMCOR amoungst other and the economic effect that loss is having on the UK

  • rate this
    +1

    Comment number 28.

    The BBC Economics Editor is producing the worst Blogs on BBC. This one is not only a copy, as stated by #27, it is also so undynamic. Previous articles from this Editor have been poor. There was one that was so full of "if" and "perhaps's" that it was meaningless. This current article says the writer forecast back in Dec that the world was likely to learn a lot from Abe.So: what has it been ??

  • rate this
    +1

    Comment number 27.

    This article is a blatant rip off. The economist ran an piece with the exact same conclusions this week. IP theft from the Beeb.

  • rate this
    0

    Comment number 26.

    The $USD is killing other countries and it does a better job on Japan than the rest.

    Plus Japan needs to stop looking up to the US for everything and do what is best for their country and people.

  • Comment number 25.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    0

    Comment number 24.

    There should be interest days ahead for the bond futures akin to a slaughter of the muppets after the Fed briefing and update. Front running is a fact of market life, dreaming bond furptures where they are was an exercise, those who bought in are being taught an expensive lesson that may become chaotic.

  • rate this
    0

    Comment number 23.

    The lesson is already apparent, the various parts of the investments markets ~ are nuts. Completely.

  • rate this
    0

    Comment number 22.

    Sometimes think we have slipped into Alice Liddel`s looking glass world. Weimar Republic money printing...bad, Zimbabwe money printing...very bad, Western Central Banks money printing...good. What is going on?

  • rate this
    +2

    Comment number 21.

    This is a rapidly aging society.A demographic time bomb is blowing up right now. BTW, in the real world of GNI Japan, not China is the second largest economy in the world and much richer. Japan has high technology, China has the machines and hands to do the dirty work of building high tech products for others but no the ability to create them. Still Japan's economy is about 1/2 the size of the US.

  • rate this
    0

    Comment number 20.

    Do the Japanese have this problem too?:

    "Young need to save for 14 years for a home, says Shelter"

    Once upon a time it was possible to convey a freehold for no capital, but subject to a rentcharge (a registrable estate in itself). The new occupiers and their successors were then committed to paying in effect interest only, for perpetuity. It's not ideal, but might be worth another go.

  • rate this
    +2

    Comment number 19.

    This is a currency war by another informal method until the world imbalance are addressed and in the 60/70/80 Japan were the cause of one of those just they produced better goods than UK. This time it is CHINA with cheap labour and poor working conditions etc

  • rate this
    0

    Comment number 18.

    16 "How can you dig a country out of an economic malaise by exporting when there is a falling demand for the goods you are exporting? "

    Really? A falling demand for TVs, Cameras, Phones etc. as China and India's populations buy like crazy?

    You have to make you products more competitive yes, but there is no shortage in world demand.

  • rate this
    0

    Comment number 17.

    Well Steph let me know when you invest some of your money in Japan and I may well follow you,for now it is a basket case,which has turned into a bear market so do not forget you let me know.

  • rate this
    0

    Comment number 16.

    How can you dig a country out of an economic malaise by exporting when there is a falling demand for the goods you are exporting?

    All that you can really do is manufacture for the domestic market by excluding imports. There might be some sense in that but this could cost you the exports that you now have.

    Rock and a hard place. It would be easier to reform the banks in the first place.

  • rate this
    +3

    Comment number 15.

    13.Friendlycard
    "Now, this is a government which already spends over 20% of its revenues on debt interest..."

    Seems governments around the world have failed spectacularly with their economic growth strategies. Add to that central banks printing money to inflate debt away, and you have to ask two things:

    a) Are countries like Japan too big to fail?
    b) How do you bail a country out?

  • rate this
    +3

    Comment number 14.

    (SF) suggests, " it is crucial that the Bank of Japan remains committed to get inflation up to 2% by pumping money into the economy like there's no tomorrow." ( S. Flanders) Pumping money may exacerbate the situation providing the quick short term money fix. The UK government used (QE) as a quick fix the result being the money in your pocket has a lot less buying power.

  • rate this
    +1

    Comment number 13.

    So, bond yields rise. Now, this is a government which already spends over 20% of its revenues on debt interest, so, if this goes any further, how will Abe find the money to service the debt?

    Print it?

 

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