Abenomics Is Working?

Snap election called by Japan PM
*This article was originally published by the blog NGDPAdvisers
Benjamin Cole | Japan has put together a string of five straight quarters of real growth, along with declining unemployment and minute amounts of inflation. Some have recently termed Abenomics “a big success.”

If so, then worth noting is that Abenomics’ “three-legged stool” of fiscal reform, less regulation and expansive monetary policy has so far been carried out on one appendage: monetary policy.

The foundation, buttresses and keystone of Abenomics has been quantitative easing.  Japan’s economic resuscitation can be laid at the feet of the Bank of Japan (BoJ), their central bank.

The BoJ

For the record, the BoJ has an open-ended program to buy 80 trillion of yen ($700 billion) a year, in an economy variously rated at between one-quarter to one-third the size of the U.S. economy. Not only that, the BoJ has vowed to buy 10-year Japanese government bonds (JGBs) whenever the yield rises above 0%.

In pursuing its QE program in recent years, the BoJ has purchased about 43% of outstanding JGBs.

I doubt there was a Western economist on the planet 10 years ago who would have predicted the BoJ could buy back nearly half of Japan’s famously large national debt, with only positive consequences.

So the Japanese government now owes a ton of money to itself, and in less than 10 years it will owe the lion’s share of national debt to itself.

The discussions about Japan’s level of indebtedness has become a variant of “Mobius-strip” economics. The Mobius strip obviously has two sides—until you run your finger along the surface and discover only one side. Japan’s national debt is disappearing, perhaps becoming monetized.

Macroeconomists disagree on this point of monetization, and it might require metaphysicians to untangle. No matter, Japan’s taxpayers are no longer on the hook, at least effectively. Japan is still in borderline deflation, btw.

Labor

Arguably the foremost accomplishment of Abenomics and the BoJ has been the creation of robust and healthy job markets to Japan, which by the standards of Western orthodox economists are “tight”

In fact, there is little or no wage inflation in Japan. Real wages in March 2017 are down 0.8% YOY.

There is also little unemployment, as measured at 2.8%, even as labor participation rates rise. Japan’s labor market is another positive feature of BoJ’s policy. As I have often said, if we want voters to embrace free enterprise, shouldn’t “tight” labor markets be a goal?

Austerity?

Along with a dearth of regulatory reforms (to be expected in any democracy), Abenomics has hardly curtailed Japan’s chronic national budget deficits.

This from The Japan Times: “Based on that [upbeat] scenario, the government expects to issue ¥34.37 [about $300 billion] trillion in new bonds in the next fiscal year [2018], down 0.2 percent from the initial fiscal 2016 budget. It will still rely on debt to pay for 35.3 percent of its expenditures.” The paper laments growing military and social welfare outlays.

Financing one-third of the national budget by issuing IOUs is hardly reform or austerity.

I happen to be a fan of smaller and balanced federal budgets in the United States, but the emergence of QE and helicopter drops as policy tools blurs the distinction between fiscal and monetary. And what means “national debt” if it can be liquidated through QE, with only positive results?

Should a developed nation in general run budget deficits, which are then paid down by QE in times of recession?

Conclusion

Japan remains inexplicable by Western orthodox macroeconomics. They run large trade surpluses, they run large federal budget deficits, they conduct massive QE, they have robust labor markets—and live in borderline deflation. Their national debt is disappearing. It is worth noting Japan has much looser property zoning that the United States.

There may be valuable lessons in Japan for the United States. Perhaps more QE and tighter labor markets—and a reduction in property zoning—can bring about more prosperity to the United States.