Japanese Prime Minister Shinzo Abe was elected in December 2012, stating that he would "implement bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment." These were the so-called "three arrows" of his economic policy. Despite evidence to the contrary, nations have yet to be dissuaded from attempting to print their way to prosperity. Few, if any, have tried as hard as Japan. The Bank of Japan (BoJ) has targeted a massive quantitative easing program that, on an absolute basis, is nearly the size of QE3 here in the states. On a relative basis, it is nearly three times as large as the Fed's recently ended program. "Flexible fiscal policy" is somewhat of an oxymoron when debt/GDP is well north of 200%, your population is aging, immigration is non-existent, and you face serious natural resource constraints. However, Abe has coupled targeted stimulus programs with an increase in the nation's sales tax as he attempts to spur growth and trim the nation's massive debt. Of the Prime Minister's "three arrows," the only potentially viable one is promoting private investment, but there have been few, if any, serious policy initiatives and record corporate cash deposits of $1.9 trillion are ample proof of failure on that front.
Not surprisingly, the Japanese economy has failed to respond to Abenomics. In 2013, the nation's economy grew 1.52%, nearly identical to the 1.45% growth rate in 2012. While the Japanese economy flourished during the 1st quarter of this year, this was simply the result of pulling forward consumer demand ahead of the scheduled increase in the nation's sales tax from 5% to 8% in April. The economy contracted in each of the subsequent two quarters and may have contracted again during the 4th quarter. Through the 3rd quarter, the Japanese economy had grown a scant 1.4% in aggregate since Abe's election.
One of the main goals of the BoJ's QE program is to stem the tide of debilitating deflation and it has targeted an inflation rate of 2%. Yet stripping out the effect of April's sales tax increase, core consumer prices rose just 0.70% in the year through November. Money printing alone will not result in inflation. As GMO's James Montier demonstrated in Hyperinflations, Hysteria, and False Memories, inflation arises when demand outstrips supply. That is not happening in Japan and we should not be terribly surprised. Real wages declined for a 17th consecutive month in November while the savings rate was negative in the year through March, the first such occurrence since 1955! Simply put, the incomes and balance sheets of Japanese consumers have deteriorated significantly.
In short, Abenomics is an unmitigated disaster for Japan. In devaluing the nation's currency, the BoJ is subsidizing exporters at the expense of importers. Yet, while the value of exports, as measured in Yen, has grown due to the weakening of the currency, the volume of Japanese exports has remained largely unchanged over the last two years. Private investment has declined, real wages have plummeted, the personal savings rate has turned negative, bankruptcies are at all-time highs, and real, annualized economic growth has averaged less than 1% since Abe's election two years ago. However, since his election, the Nikkei 225 has risen 70%. Maybe that shouldn't surprise us. We know from the American experience that the liquidity pump has a powerful effect on equity markets. Additionally, the BoJ has been buying equity ETFs since 2010 and has increased such purchases under Abe-appointed central bank chief Kuroda. Sadly, despite mounting evidence to the contrary, global central bankers, and the politicians that appoint them, continue to believe that quantitative easing is the only game in town. As a result, we are witnessing a massive misallocation of capital on a global scale heretofore unknown. Given its global nature and scale, the bursting of bubbles engendered by this massive monetary largesse is likely to result in a massive decline in the value of global financial assets.
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