"Abenomics Are a Failure, Not a Model" - Column by Mathilde Lemoine for Challenges Magazine

Editorial - 2/26/2016

Mathilde Lemoine, Group Chief Economist, published on Thursday 25 February a column in Challenges Magazine on the subject of Japan.

Abenomics Are a Failure, Not a Model

Instead of implementing reforms and improving its productivity, Japan gave preference to public spending and money printing. A didstrous example the ECB would do well not to follow.
Three years after Shinzo Abe was elected as Prime Minister of Japan, despite his thundering announcements of an economic "big bang", the country remains mired in economic stagnation. Its GDP shrank by 0.4% in the fourth quarter, bringing growth for 2015 to a mere 0.4%. Three policy "arrows" were meant to hit the target of drawing Japan out of deflation: a massive stimulus plan, ultra-expansionary money policy, and structural reforms. As it has often done, the Government began by increasing public spending and the Central Bank's balance sheet (see graph) rather than undertaking agreed-upon structural reforms such as increasing the employment rate, improving corporate governance, or deregulating certain sectors.


The results speak for themselves. Public deficit reached 7.7% of GDP, public debt reached 230% of GDP, and the Bank of Japan now holds more than 30% of national public debt. GDP, however, shrank in two of the four quarters of 2015 and inflation was close to zero at the end of 2015.
Faced with such failure, the Bank of Japan decided to take the entire world by surprise by setting negative interest rates for new bank reserves deposited with the Central Bank. Such a measure has been used by other central bankers (in Switzerland, Sweden, Denmark, and the euro area), but will not likely lead to growth in Japan. Furthermore, this decision has already had the opposite effect of what was intended, with the Japanese Yen growing stronger after losing almost one-third of its value since Shinzo Abe took power.
Of course, the unemployment rate is at 3.3%, but this low figure is the result of a policy put into place after the 1998 recession to make the labour market more flexible and to reduce salaries. Still, the high proportion of temporary employees is limiting salary growth, and retirements are only heightening this effect because the retirees are often qualified workers with high salaries.
After all of the praise it received, the time has come for a critical look at Abenomics. Increased public spending and massive liquidity injections are not enough to fight deflation. It is also necessary to increase the productivity of the economy as a whole. This essentially determines investment incentives and the pace of both wage growth and inflation. Productivity in Japan stands at only 0.75%, compared with 3% in the 1990s. If economic policies are not focused on investment, innovation, education, and further training, there is not enough incentive to invest and monetary policy fails to have an inflationary effect. Contrary to what ECB President Mario Draghi recently said, Japan's model is certainly not an example to follow.

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