It all started very well. Even before being elected, Shinzo Abe´s words made a splash with markets ‘rejoicing’. The chart pictures the stock market and the exchange rate relative to the dollar.
The US´s ‘taper talk’ in May sort of put things on ‘hold’, and that´s where they have been since. Furthermore, in the last few days the Japanese have worried about the fallout from the US government shutdown and the anticipation of the looming debt limit. This is what BoJ Governor Kuroda said:
“If this situation drags on, it could have a serious effect on the U.S. economy and eventually the global economy,” Mr. Kuroda told a news conference following a two-day meeting of the BOJ’s policy board. Asked about the consequences of a failure by U.S. policy makers to raise the borrowing limit, the governor said: “Generally speaking, central banks are capable of handling tail risks if they materialize.”
It should be noted that all the while the world economy was growing and emerging markets booming, Japan was mostly mired, except during a few short years of QE, in deflation and very low or no real growth.
This week’s Economist has this to say:
But the economic improvement remains tentative. Smaller businesses are less optimistic than big ones. Inflation is rising partly because a depressed yen makes imports of fuel more expensive. The government’s efforts to press companies to raise employees’ wages to support consumption appear to be getting nowhere. Growth may yet stumble early next year. When Mr Abe announced a temporary stimulus worth ¥6 trillion ($62 billion) to offset the contractionary effects of the higher consumption tax, it was certainly justified—provided it is indeed temporary.
The good thing in the paragraph above is: “The government’s efforts to press companies to raise employees’ wages to support consumption appear to be getting nowhere” (see Lars).
Maybe the problem lies with the program set-up. I´ll not consider the second and third “arrows” (fiscal stimulus and structural reform). In the ideal set-up, fiscal stimulus is not needed, and structural reforms should not be confused with the requirements for short term stabilization.
Maybe the first arrow of the program – monetary stimulus – has ‘low power’. Abenomics is couched in terms of doubling the monetary base and a 2% inflation target, but the monetary base is not a reliable indicator of monetary ease and inflation targeting has lost its allure.
The chart below indicates that it is growth in the broad money supply (M3 in this case) and not the monetary base that is related to nominal GDP growth.
In finer detail the picture looks like:
It appears that to get nominal growth up to something like 4% or 5%, Japan would require M3 growth in the range of 8%.-10%. Hopefully real growth would come in at around 3%. Nothing spectacular but much better than the real growth performance over the last 20 years.