Abenomics

Abenomics, the term given to the reform package Japanese prime minister Shinzo Abe launched to revive the country’s economy, is based on two myths. One is that the economy has performed badly and the second is that this non-existent failure has been due to deflation. Despite its lack of intellectual justification, the attempt to stop deflation has been a success as the accompanying rhetoric and monetary policy have produced yen weakness. This was an essential step towards solving Japan’s fiscal problem and, as the rhetoric has been about deflation rather than devaluation, the dramatic weakness of the currency has been achieved without international opprobrium.

Over time the devaluation should result in an improved current account. This will allow the fiscal deficit to fall while the economy moves ahead, but it is not enough on its own. The other essential is to reduce the cash flow surplus of the business sector. Having achieved success in step one, largely by accident, there is a chance that Abenomics will succeed in step two. If it does, it is again likely to be an accident. Read more

The Japanese government is trying to encourage the country’s companies to increase the amount they invest. This is like trying to push water uphill. Japan as a whole and in terms of business already invests too much.

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Deflation provides a good example of economists’ bad habits. They assume that people behave in the same way even if they live in different countries and that their behaviour does not change over time. They are sometimes right. But deflation and inflation show how misleading this tendency to generalise can be. Today deflation is a danger for the eurozone, but not for Japan.

Deflation can cause problems, but not always. As I pointed out in my previous blog, since its market crashed in 1990, Japan’s gross domestic product grew more when prices fell than when they rose. Read more

Abenomics – the policy endorsed by Shinzo Abe, the Japanese prime minister – aims to raise the country’s growth by getting rid of deflation. It is based on two myths. The first is that the economy has done badly and the second is that it has been hurt by deflation.

The first myth comes from judging a country’s economic success by its gross domestic product. Japan has a falling and ageing population. If allowance is made for this, Japan has been the most successful of all Group of Five leading economies. It is the country whose GDP at constant prices per person of working age has grown most rapidly, at least since 1999. Read more