Reuters: There Is No Plan B for Japan, as Abe Bets the Whole Country on His Economic Programs Dubbed "Abenomics"

Japan’s Prime Minister Shinzo Abe in the cockpit of T-4 training jet at the Japan Air Self-Defense Force base in Higashimatsushima, Miyagi prefecture, May 12, 2013. REUTERS/Kyodo


Tank commander was clearly not enough. What's next? A battleship captain?

Good luck, Japan. You'll need it. Even that won't help you much with the leader like this.

From Reuters Opinion page, by Anatole Kaletsky (5/17/2013; emphasis is mine):

The 3.5 percent gross domestic product growth announced by Tokyo Wednesday suggests that Japan may be the fastest-growing economy in the G7. Since the Tokyo stock market hit bottom exactly six months ago, the Nikkei share index has soared almost 80 percent. Meanwhile, the yen has experienced its biggest six-month move against the dollar. All these events appear linked to the election of Shinzo Abe and the regime he has installed at the Bank of Japan.

Even after 20 years of stagnation, Japan remains the world’s third-largest economy, with a 2012 GDP of $6 trillion, equal to France, Italy and Spain combined. Financiers, business leaders and economists everywhere are starting to ask the obvious question: Is Japan finally taking the truly radical action required to fix its economy and end its “lost decades”?

This, however, is the wrong question. It confounds two very different issues – which need to be carefully distinguished to understand what’s happening in Japan.

The first question is whether Japan is truly committed to actions far more radical than anything attempted in the past 20 years. The second question is whether these actions, if pursued with determination and persistence, will fix Japan’s economy.

The first question was answered with a clear “yes” in March, when Abe appointed Haruhiko Kuroda as the governor of the Bank of Japan. Kuroda is an independent thinker, light-years from the consensus-seeking bureaucrats who have dominated Japanese policymaking for 20 years.

Kuroda demonstrated this immediately, in his first meeting of the BoJ council. He announced a monetary stimulus of staggering proportions – roughly three times larger, relative to the size of the Japanese economy, than the Federal Reserve’s quantitative easing in the United States.

But that still leaves the second question: Will Japan’s unprecedented macroeconomic expansion succeed in delivering the hoped-for economic growth? The answer is “maybe.”

Most bottom-up analysts, economists and investment analysts, who study companies and industrial sectors in detail, put the probability of success at well below 50 percent. Japan, after all, has profound structural problems: a shrinking population, misallocation of investment, enormous public debt, protectionist lobbies in service industries and agriculture, inflexible labor practices, unimaginative management – the list could go on. None of these can be fixed by monetary policy.

Why, then have stock market investors turned so bullish? Because top-down investors, who seek to profit from macroeconomic trends, have ignored the skepticism of bottom-up investors. To see why they have done this – and why they may be right – let us return to my two questions.

Bottom-up analysts, who think mostly about structural issues, quite reasonably argue that macroeconomic policies, however bold, will not help Sony invent the next iPhone. They will not turn frugal pensioners into spendthrifts or stop Japanese companies from hoarding profits instead of distributing excess cash to shareholders through higher dividends or to workers through higher wages.

Macro-investors, on the other hand, see unprecedented fiscal and monetary expansion as a good enough reason to buy Japanese equities and sell the yen. But if bullish macro-investors keep acting on Japan with enough conviction, they could change Japanese economic reality and win their intellectual contest with skeptical bottom-up analysts.

(In other words, exactly the same forces that have been driving the US stock market up so much that even the financial cheerleaders at CNBC are voicing concerns that the market does not reflect the main street at all. But then who cares about the main street, other than people on the main street? Now, onward with the article's conclusion part...)

Finally, the macroeconomic stimulus of the past few months is only the beginning, not the end, of the Abe program. Abenomics has been described as a quiver with three arrows – fiscal stimulus, monetary expansion and structural reform. The third arrow will be fired only if Abe wins the Upper House election in July.

After that election, Abe is almost certain to make structural reforms in areas such as international competition, female labor participation, employment deregulation, lower energy prices and corporate taxation. These reforms will likely meet with opposition from powerful political lobbies. But some, at least, are almost certain to go ahead.

The reason is that Japan will have no choice. The fiscal and monetary expansion started in the first few months of Abenomics has been so extreme that there is no turning back. Unless Japan can achieve much faster economic growth, Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it will bankrupt the financial system and possibly trigger hyper-inflation.

In short, Abe has bet his country on the success of his economic program. He will now be forced to do whatever it takes to achieve strong growth, both through macroeconomic stimulus and structural reform.

The financial arithmetic of Abenomics means that tolerable stagnation is no longer an option for Japan.

The Abe administration seems to think the economy will grow if female labor participation goes up. They look at the statistics in other countries, and see the statistical significance (I don't think so, but they do) as the causality. How are they going to lower energy prices with the falling yen? Who knows? Nobody cares, particularly not those "macro" investors - i.e. Goldman Sachs and J.P.Morgan Chase. "Macro" means nothing but government policies these days, and no one is more proficient in "macro" investment than these two.

There is no "Plan-B", as Abe bet the whole country on the success of his pet project that he says he polished over those years after he resigned from the premiership till his party's win in 2012 December election.

For the likes of Abe, if his pet project ends in an unmitigated disaster that finally sinks the country (and a good chunk of the world economy with it - after all, Japan is still the third largest economy), that will be probably OK as long as his name will be associated with the disaster, making history.

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