The Japanese Economy

First there was Mellonomics, associated with inter-war US Treasury Secretary Andrew W. Mellon. Then there was Reaganomics, essentially a 1980s version of the same thing. Simultaneously there was Rogernomics, attributed to New Zealand finance minister Roger Douglas. In the 1990s, inevitably, came Clintonomics.

All of this left me wondering whether I might earn immortality by inventing the next such term. I wondered about Pharaoh-nomics – an ancient Egyptian philosophy based on turning the entire economy into a pyramid scheme – until I realised that this is already being practised across much of the developed world.

I dismissed both Santa-nomics (a policy based on free gifts) and Popeye-nomics (adopting spinach as a currency) on the grounds that they were just too silly. Little did I know that something even sillier than Santanomics or Popeyenomics was waiting to stake its claim to fame.

Enter Abenomics…………

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Whilst I’m pretty sure I wasn’t the first to predict the disastrous failure of Japan’s off-the-wall economic experiment, I doubt if many have been more emphatic about it than I have. The latest flow of news from the Land of the Sinking Economy Rising Sun confirms that Japan is moving ever closer to the precipice. It’s easier for me than for others to take this view, of course, because I have access to a surplus energy economics model which shows that there is absolutely no way out for the Japanese economy.

For any student of economics, Abenomics is a marvellous example of how to get absolutely everything wrong at exactly the same time. It’s also a classic case of “be careful what you wish for”. Japanese Prime Minister Shinzo Abe has made it clear all along that he wants higher inflation and a weaker yen. As soon as the markets come to understand what is really happening to the Japanese economy, he’s going to get plenty of both.

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As everyone surely knows, Abenomics is a response to Japan’s so-called “lost decade”, a period of stagnation which, in fact, has lasted for well over twenty years.

In the 1980s, Japanese asset values soared to truly absurd levels, with the grounds of Tokyo’s imperial palace once being worth more, on paper, than the entire State of California. After the bubble burst, economic output stagnated, and inflation gave way to deflation, whilst government debt soared to levels which would long since have bankrupted the country were it not for Japan’s traditionally very high savings ratio.

Described as a series of “arrows” (there’s nothing like being abreast of the latest military technology, is there?), Abenomics involves injecting huge stimulus into the economy whilst simultaneously boosting net exports by creating a sharp reduction in the value of the yen. The fiscal stimulus programme was expected to increase the budget deficit to 11.5% of GDP, whilst money printing quantitative easing of at least US$1.4 trillion effectively doubles the money supply.

Theoretically, these policies could work in tandem, because expanding both public spending and the deficit, whilst also running the printing presses on such a gargantuan scale, is indeed very likely to undermine the value of the currency.

This, it was argued, would stimulate consumption as well as boosting exports, thus injecting two forms of growth into the economy whilst also creating some healthy inflation.

Unfortunately, it hasn’t worked out in quite the way that Mr Abe thought it would. For a start, modest increases in exports have been far exceeded by the escalating cost of imports – instead of creating a strong net surplus, Abenomics has just delivered the worst trade deficit in Japanese economic history. Growth, too, has fallen far short of expectations, coming in at just 1% in the latest quarter, a long way adrift of the 2.8% that the markets had been encouraged to anticipate.

All the time, of course, there has been further escalation in a mountain of government debt that was at eye-popping levels even before Japan implemented its exercise in economic insanity.

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There were, you see, one or two little snags that the Japanese government had somehow failed to notice when it designed its Abenomics policy. The first of these was that Japan, already one of the world’s biggest importers of energy, shut down its nuclear industry in response to the 2011 Fukushima disaster.

This is likely to have pushed Japan’s net imports of energy up from 412 mmtoe (million tonnes of oil equivalent) in 2010 to 445 mmtoe last year, equivalent to 95% of the country’s consumption. Combining this volume increase with the slump (of about 20%) in the value of the yen not only increased Japan’s import bill but also piled a lot of extra costs onto consumers – the very people, of course, who were supposed to boost economic activity by hiking their discretionary spending……

Second – and, again, apparently unnoticed by Mr Abe – the Japanese population continues to age. Reflecting this, Japan’s historically super-robust savings ratio is trending steadily downwards as people reach the age at which they need to draw on their savings instead of adding to them.

I must admit that I am baffled by the government’s apparent ignorance both of the post-Fukushima situation and of Japan’s demographic trends. Be this as it may, the combined result has involved soaring public debt, a widening deficit, a diminishing ability to fund borrowing from domestic savings, a yawning trade gap, a far smaller increase than might have been expected in consumer spending, and, needless to say, a shortfall in growth even at a time when huge stimulus has been poured into the economy.

Who’d’ve thought it?

Now, cognisant (at last….) of the limits to the ability of the state to borrow, the government is increasing its sales tax from 5% to 8%, effective 1st April. Since this tax hike was announced well in advance, it is highly likely that consumers have brought forward their spending, flattering recent figures whilst positioning the economy for a sharp fall once the higher tax takes effect.

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Modest though it may seem, the increase in sales tax marks the beginning of the end of Abenomics.

This, you see, is the first time that Mr Abe has moved his foot from the throttle to the brake. It certainly won’t be the last retreat for a government which, having put its policy foot to the floor in pursuit of higher growth and improved trade, has found itself contemplating instead an evil brew of economic stagnation, debt escalation and widening trade deficits. Factor-in the diminishing ability (and, presumably, the decreasing willingness) of the Japanese public to fill the budget deficit and you have all the ingredients for a disaster.

This should come as no surprise, of course, to anyone familiar with surplus energy economics. If you download the chart below, you will see that Japan’s real economy, already far adrift of a financial economy inflated by borrowing, is poised to slump alarmingly.

Essentially, this is game-over.

Basically, Japan has three critical problems:

– It is a major importer of energy at a time when the energy cost of energy (ECOE) is moving inexorably upwards.

– It entered this era with far too much debt.

– It has a government which thinks that you can borrow and print your way to prosperity.

Where Japan is concerned, the writing is already on the wall. For the rest of us, the impending collapse of an economy which still accounts for close to 6% of global GDP ought to concentrate minds wonderfully.



Japan & Global