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Where Abenomics Went Wrong

Japan has slipped into recession, the ultimate mark of failure of Prime Minister Shinzo Abe's ambitious but misguided efforts to turn around the nation's economy.

After dissolving Parliament last week
After dissolving Parliament last week
Eric Le Boucher


The difficulties Japanese Prime Minister Shinzo Abe is currently facing are a call to humility for the world's political leaders: all those who offer easy, preconceived solutions, but also for those who are more realistic but believe that economic policies will nicely and quickly work out the way they do on paper. The crisis is more unruly than that.

Abe decided last week to dissolve the lower house of parliament and to call snap elections for next month. Not that his political position had become untenable. On the contrary, it's as solid as ever, and his Liberal Democratic Party (LDP) will undoubtedly win a new majority. Abe will thus have a free hand for the next four years, which is actually why he opted for the dissolution. But in reality, his economic policy, branded by some as "magical," has floated about as well as a lead balloon.

Abe is a right-wing hawk when it comes to foreign policy and a left-wing one for economic policy. He took office two years ago promising to "bring Japan back." To do so, the daring samurai armed himself with "three arrows." The first one was monetary, aimed at bringing the too-independent Bank of Japan into line and starting up the money machine at full throttle. The desired effect was to flood the economy with liquidity to kickstart inflation and bring the yen's value down to boost exports.

The second was budgetary. The central bank was to buy treasury bonds en masse so the state could finance a massive infrastructure plan.

Finally, the third arrow consisted of structural reforms to ease regulations on trade and work.

But practice hasn't been as easy as theory. It's still too early to say that Abenomics has failed, but coming out of the crisis in Japan as well as anywhere else appears to be less like the stunning image of wild geese flying towards the red sunset and more like that of the prime minister ingloriously floundering in the mud of the real economy.

Over the last six quarters, average growth has stood at a mere 1.4%, not much better than the 1% of Abe's predecessors. Worse, Japan recently fell back into recession. And inflation, far from reaching the expected 2%, remains stuck below 1%. Why?

Strategic misfires

The drop in the yen didn't translate into export growth. That's because the Japanese sell high-quality products that depend very little on prices. Instead, the price of energy, which is entirely imported since the shutdown of nuclear power plants, has risen, burdening family budgets and penalizing consumption.

Another disappointment was that the abundant monetary liquidity didn't deliver on the promise of boosting the stock market and prompting a "wealth effect" that would have stimulated consumption like in the United States. The Japanese population being older, it saved the money earned on the markets.

The April decision to raise sales taxes from 5% to 8% only affirmed consumer hesitation to buy. With a debt worth 240% of its GDP, Japan's financial situation is disastrous. Like in France, all that's holding the country's economy together is the markets' belief that the country can levy taxes easily. With the sales tax increase, Abe was showing that indeed he could.

But that is blamed for having broken the recovery. Nobel Prize-winning columnist Paul Krugman sees the mark of "failure" of Abenomics in that decision. The prime minister wanted to have more than one iron in the fire. To gain market trust, he lost the people's. Forced into a corner, the government has postponed the second planned increase until 2017.

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Bank of Japan headquarters in Tokyo. Photo: Fg2

This debate between supply policy and budgetary rigor, which is also happening in Europe over the question of austerity, demonstrates that it's difficult to find a balance between the two contradictory imperatives.

Another measure illustrates this too. Since the adopted monetary policy was going to bring down interest rates, the country's many pensioners were going to suffer poor savings gains. The government asked savings funds to sell part of the treasury bonds they were holding in order to buy Japanese stocks. The expected boost on the stock market was supposed to compensate that loss. At the same time, to prevent Japanese debt from falling into the hands of uncontrollable foreign investors, the Bank of Japan bought the whole package thanks to a second wave of equities buying.

But all these carefully planned maneuvers fell flat. Savers didn't consume more, and foreign investors now question the Bank of Japan's reliability. A loss of both fronts.

The last arrow, the reforms, also got lost, though nobody knows where. Abe did manage to open a few thousand positions for women and to allow a few shops to open longer, but the positive effects are weak and will take years to be realized.

The prime minister will no doubt be reelected next month and will then have four years ahead of him to fix his reforms. He needs at least that long. Growth forecasts for 2015 are no more than 1%.

Abe deluded himself, putting too much faith in magical monetary easing. His two other arrows were less valuable, poorly sharpened and misfired. There's no magic in economics. The real weapons are not currency, but hard work and patience.

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