Japan has been suffering from a two decade long recession referred to as the Lost Two Decades. In the time period from 1995 to 2007, Japan’s GDP fell from $5.33 trillion to $4.36 trillion and the country continues to experience a stagnant price level and low inflation rates. Japan’s Prime Minister, Shinzo Abe, has responded with “Abenomics” as a means of revitalising Japan’s economy. Abenomics includes three different steps: first, printing additional currency anywhere between 60 trillion and 70 trillion yen to encourage modest inflation and bolster the competitiveness of Japan’s exports; second, the addition of new government spending programs to increase demand; and third, structural reform in industry.
Abenomics has been applauded by Japan’s central-bank governor, Haruhiko Kuroda. Together, Abe and Kuroda set a goal of reaching 2% inflation through quantitative easing, a practice wherein the central bank purchases bonds from the government as a means of increasing currency in the economy. However, Abe is no longer cooperating with Kuroda. Abe has failed to cut entitlements and the deficit; furthermore, Abe is no longer supporting the amount of quantitative easing that Kuroda has initiated.
Perhaps more troubling, Abe has stopped increasing consumption tax which was to combat the deficit. When Abe increased consumption tax from 5% to 8%, it reduced spending. In response, Kuroda increased quantitative easing by promising to buy 80 trillion yen worth of Japanese bonds every year as an attempt to strong-arm Abe into further tax hikes. Despite this, Abe has refused to increase consumption tax until April 2017. As nonsensical as it may seem, Abe’s resistance is largely for political reasons; small businesses and households don’t feel the benefits of quantitative easing and believe that it only helps big exporters. Members of Abe’s advisors think that printing too much money creates currency instability and volatility. Furthermore, deficit reduction through touching entitlements is political suicide, despite the fact that increasing the retirement age and forcing the elderly to pay more for their medical expenses seems necessary.
While Abenomics is sound in principle, the political reality which constrains it means that many more decades may be lost in Japan. It seems unlikely that Abe will swallow the political costs in order to invest in Japan’s future.