Will Shinzo Abe, Japan’s new prime minister, rescue his country’s economy from two decades of lassitude? Or has “Abenomics” launched a currency war and pushed Japan closer to hyperinflationary collapse? The plausible answer is: neither. The risk is that the policies of his government will fail to make a difference, in either direction.
What, then, is Abenomics? It has three elements: renewed fiscal stimulus; pressure on the Bank of Japan to agree a higher target for inflation; and still unspecified structural reforms. More precisely, as JPMorgan’s Masaaki Kanno noted in the Financial Times, the government has announced a supplementary budget that will increase fiscal spending by 2 per cent of gross domestic product, raising the likely deficit to 11.5 per cent of GDP in 2013. Tokyo has also not only pushed the BoJ to finance this deficit, but has strong-armed it into accepting an inflation target of 2 per cent.
Will this set of measures transform Japan’s performance and, if so, in which direction? To answer this, we need to consider four aspects of the country’s economic record.