In case you managed to miss it, there’s been a fair bit of hand-wringing over the fact that Japan has fallen back into a recession despite the supposedly heroic intervention called Abenomics, whose central feature was QE on steroids.
But Japan of all places should know that relying on the wealth effect to spur growth has always bombed in the long term. They were the first to try that approach of a large scale. That idea was the basis for the Bank of Japan keeping monetary policy super loose in the later 1980s. They explicitly wanted to increase stock market and real estate prices to stimulate more consumer spending. We know how that movie ended.
As Marshall Auerback, who in a previous incarnation was an analyst of the Japanese economy, pointed out by e-mail:
Japan has fallen back into recession because the government has repeated the mistake of 1996 by hiking the consumption tax.
Now Abe says he’s not going to increase it again.
Given that QE has never “worked” anywhere I never could understand why Japan’s version should work now.
Wolf Richter provides more granular detail:
Here is what this fiasco of Abenomics looks like, annotated:
The chart shows how the hype of Abenomics initially created a lot of excitement. Then reality set in. This was followed by the brief but thrilling era before the consumption tax hike that triggered a vast bout of front-loading, much like the prior consumption tax hike 17 years ago had triggered. This was not a surprise, not to readers of WOLF STREET. But Abenomics apologists were claiming at the time that Abenomics was performing miracles.
Then the hangover set in as the tax hike took effect on April 1. The prior tax hike had been followed by a steep and long recession. This one appears to follow the same procedure. Again, no surprise.
In fairness, Abenomics did include a burst of fiscal spending, but a short-term jolt followed by a tax increase was not going to work.
But the more interesting question is why anyone is surprised at Abenomics’ failure. Chalk it up again to fealty to orthodox, as in bad, economic thinking. Bill Black has a field day with a New York Times story that attempt to rationalize what happened:
The New York Times published a story by Liz Alderman dated November 17, 2014 entitled “As Japan Falls Into Recession, Europe Looks to Avoid It.” The article begins with a burst of (unattributed) economic illiteracy.
“Japan looked like the model for economic revival. Growth was back on track. The stock market was surging. Inflation, which had eluded Japan for decades, was even returning.
But Japan’s grand economic experiment, a combination of fiscal discipline and monetary stimulus, is collapsing. On Monday, the country unexpectedly fell into recession, a downturn that has painful implications for the rest of the world.
Japan’s unorthodox strategy was supposed to offer a road map for other troubled economies, notably Europe. Fiscal belt-tightening and tax increases, while leaning on the central bank to pump money into the economy, was expected to help overcome a malaise.”
In a prior column I gave mock praise to Alderman because after editorializing for eurozone austerity for years in her columns she finally admitted that “many economists” criticized those policies. I cautioned, however, that the NYT reporters, including Alderman, assigned to cover the eurozone “are austerians to the core.” Here comments about Europe and Japan prove my point. First, Japan did not look like “the model for economic revival” when it endorsed austerity through sharp increases in its sales tax. It looked like a model for a gratuitous recession. The stock market surge and moving towards achieving desirable levels of modest inflation occurred in part in response to the fiscal stimulus that the new Japanese government decided to replace with fiscal austerity. But other government policies were more important in explaining these results – and explaining why they were artificial. By announcing the rise in the sales tax from five to eight percent in advance the government spurred a sharp increase in consumption of durable goods prior to the increase. By moving government funds from safer investments to stock purchases the government spurred a rise in the stock market.
Japan did not fall “unexpectedly” into recession from the perspective of financially literate economists. It fell into a recession that it was warned was a grave risk given its adoption of austerity through a sharp increase in the sales tax (with a further increase scheduled for next October that will likely now be suspended). Contrary to what Alderman’s column implies, Japan has not even reached its inflation target of two percent. Austerity was madness in these circumstances. We certainly never expected it to work in Japan.
“‘The numbers are absolutely awful, beyond-description awful,’ said Peter Tasker, a longtime analyst of Japan’s economy and a supporter of Abe’s policies. ‘It’s clear that the tax hikers and the fiscal hawks have tanked the economy.’”
Alderman is shocked, shocked that austerity has (again) caused a gratuitous recession. There is an ironic proof of how non-shocking Japan’s latest recession is – from two-and-a-half years ago. It is ironic because it is contained in an economically illiterate article in Bloomberg of the usual “there is no alternative” (TINA) to austerity dogma. Every aspect of Bloomberg article is driven by ignoring the fact that Japan has a sovereign currency and inadequate inflation (and, often, deflation). The article’s meme is that Japan’s government is dealing with its acute “fiscal crisis” (sic) by showing the courage to “tackle [the] sales tax ‘taboo’ that Obama won’t touch.” As bad as the Bloomberg article was, it did admit that raising the sales tax would endanger Japan’s “economic growth” and that “the last time Japan did so, it helped cause a recession.”
The article (unintentionally) admitted that Japan’s “fiscal crisis” was fictional because Japan has a sovereign currency.
“Japan’s debt to GDP ratio is estimated to rise to twice the size of the economy this year, compared with Greece’s 123 percent, according to the Organization for Economic Cooperation and Development.
A deteriorating fiscal situation hasn’t spurred an increase in Japan’s benchmark bond yields yet, with 10-year securities yielding 1.3 percent — the lowest among G-7 nations because of the economy’s deflation.”
The supposed “crisis” from a budget deficit is supposed to be hyperinflation. Japan, according to the article was suffering from “deflation.” Some “fiscal crisis!” Hyperinflation is supposed to cause crushing interest rates when the government borrows money – except that Japan was able to borrow enormous sums as exceptionally low interest rates. Some “fiscal crisis!”
To sum it up, Bloomberg praised Japan’s leadership (Abe’s predecessor) for taking an action sure to reduce economic growth and that had recently thrown Japan back into a gratuitous recession, in order to “fix” a fictional “fiscal crisis” that was actually critical to recovery. The article then turned to demeaning Obama as lacking the courage to inflict a consumption tax (VAT) on the U.S. despite (sound the hysteria horn) “a projected record budget deficit of $1.6 trillion this year.”
Yves again. So understand full well why austerity gets such favorable treatment. In its current version, where central banks use QE and super-low interest rates to offset its bad effects, the result is rip-roaring asset prices and a continued shift of income and wealth to the rich. The financial classes, who have considerably sway with the media, want to be sure these beatings continue until morale improves.