Shinzo Abe and Global Japanification
Japan serves as a “Petri dish” for central bankers and their capacity to generate inflation through monetary policy, said Nick Moroutsos, global head of bonds at Janus Henderson. “We should look at this model and say, ‘maybe we are not able to generate inflation.’”
Did Abenomics succeed?
The simple answer is: no. The central goal of Abenomics was an inflation target of 2 per cent. Yet even before Covid – 19, Japan never got closer than about 1 per cent. This is failure.
By JM Hamilton (9-6-2020)
Happy Labour Day.
Aside from the never-ending circus that has come to define American politics, there were two key events that jumped out in the last two weeks. The first was the announced retirement of Shinzo Abe, the Prime Minister of Japan, who served a record time in office. The second, within the United States, was the announcement of a “new” Federal Reserve policy designed to keep the pedal to the metal – in regards monetary policy – to achieve a targeted 2% inflation rate. The link between these two events – seemingly two worlds apart – was Japan’s greatest export ever: Economic Japanification & ultra-accommodative monetary policy.
Japanification describes an economy characterized by: stagnation, colossal public debt (better identified by an extraordinary debt to GDP ratio), an aging population, deflation, highly accommodative monetary policy (driven by, & simultaneously facilitating, too much private & public sector debt… in the ultimate Catch-22), flat wages over time, and marginal GDP growth.
Sound familiar? It should… for the Japanification described above not only applies to its namesake, but many Southern periphery European nations, as well as, the United States and the UK (all to varying degrees). At the center of the storm, or Japanification, are central banks who attempt to kick start the economy – repeatedly – with the same ultra- accommodative monetary policy (characterized in layman’s terms by money printing, the purchase of government & corporate bonds, as well as, interest rate suppression, et al.).
The goal of loose monetary or easy money policies (often referred to as “dovish”), deployed by many central banks around the globe, is that a flood of money should spur business loans and entrepreneurship, followed by a robust economy, with a heavy demand for labour. The resulting robust economy should stimulate GDP growth, competition for labour, and wage growth, as well as, the targeted inflation… at least in theory. But for many decades now, in Japan, and since 2008, w/in the United States… instead of a virtuous growth cycle, the many countries deploying Japan’s easy money policies have seen the aforementioned Japanification or stagnation. (In fairness to the Japanese Prime Minister, Mr. Abe, his country's problems go back to a property and stock market bubble, spanning the mid-eighties to the early nineties. And the Bank of Japan, or BOJ, had in place dovish monetary policies long before Abe was voted in as PM.)
All of which begs the question, if Japanification and ultra-accommodative monetary policy are proven failures, in terms of its stated objectives, why do global central banks keep utilizing it, again and again? To answer that question, we need merely follow the forensic golden rule by resolving the riddle: follow the money, and who benefits?
The beneficiaries of FED policy – which has aped the BOJ’s monetary policy - going back to 2008 crisis and into the present day, are: nearly all the asset classes of the American aristocracy, especially the stock market. Loose monetary policy, or easy money, fuels M&A, public and commercial debt w/ exceptionally low yields, bank fees, underwriting fees, consolidation, cartel & monopoly, financial engineering and stock buybacks … all of which feeds a great deal of speculation in the stock market, with attendant extreme valuations. Compounding this stock market speculation further is interest rate suppression, as the bond market affords little or no yield. Zombie companies win. Politicians also benefit: hard fiscal choices are put off further then they should; endless war is financed by the FED; seemingly endless deficits are funded by the FED; and since the FED, and central banks, often present themselves as economic saviors, the Congress feels free to abdicate its responsibilities to govern.
So to get back to the question at hand, who benefits(?): The elites at the top of the pyramid, bank majors, and the financialized economy (aka within the US, the Wall Street economy), and of course, politicians. Who loses? Well, that would be each country’s respective labour pool, Democracy itself, and the Main Street economy (we can see this firsthand, presently, w/ tens of thousands of failed businesses, tens of millions unemployed, and little or no wage inflation to be found anywhere). Even pre-pandemic, wages were stagnating throughout the West for decades. In fact, since consolidation, monopoly, monopsony – instead of entrepreneurship – are among the primary outcomes of the dovish monetary response to Japanification, the globe’s central banks actually end up creating the very deflation and stagnation (doom loop) they say they want to defeat.
Thereby, proving once again, fiscal & monetary trickledown policies are a failure.
Perhaps as alarming, the asset bubbles these central banks create provide a convenient distraction from the real economy or Main Street economy, and more importantly: LABOUR’S WOES. And if elites, the donor class, billionaires, and multinationals are doing well – and the management & stockholders of the latter are doing well – then there’s less of a sense of urgency to make the hard structural choices & decisions necessary to address the malaise & stagnation surrounding Japanification and the easy money policies that further fuel it.
And here, Mr. Abe is both informative and instructional. Japan’s Prime Minister knew that highly dovish monetary policy, alone, would not turn around Japan’s economy, but rather, loose monetary policy must be coupled with fiscal action, along with – and this is key – structural reforms.
Structural reforms with a labour first perspective, that would place more money in labour’s/consumer’s pockets, which would, in turn, spur aggregate demand, consumption, and growth in GDP.
Here, Mr. Abe hoped that the private sector would increase Japanese labour’s wages. Relying on the generosity of multinationals to voluntarily raise worker wages, unfortunately, didn’t work out for Japan.
So what structural reforms would JMH propose, as opposed to multinational charity: a living wage; end the gig-economy; the elimination of America’s failed & nefarious for-profit healthcare system; strengthening America’s labour laws and unions, perhaps with codetermination thrown in (see Germany); the breaking up of America’s seemingly endless number of monopolies & monopsonies… just to name a few remedies. By doing these things, in whole or in part, America would end up placing more money in the consumer’s and labour’s hands, with the long sought after benefits to the economy. And of course, barring the above or in concert with the above structural reforms, there’s also fiscal spending, like a Green New Deal or an Economic Bill of Rights. Perfect for the Great Depression we currently, likely, find ourselves in.
But all of the above structural change, or fiscal proposals, requires an effective and responsive, representative government, and the American political duopoly – at least the current generation of Dems & GOP, presently in power – are too corrupt and simply not up to the challenge.
Which leads us back to central banks… here, if the central banks want to truly lead, and end Japanification, they have two tools for maximum efficacy: a) public debt forgiveness (extraordinary public debt is used as an excuse by politicians to exact austerity upon the citizenry); and b) helicopter money – or UBI – placed directly into the hands of each and every American, for the span of the crisis or perhaps even in perpetuity.
Until structural reforms, in combination w/ fiscal spending, are coupled with loose monetary policy, expect the problems of Japanification to continue and compound, especially raging inequality. In fact, fiscal spending & structural reforms – directed at labour - w/out loose monetary policy (particularly, if debt forgiveness is applied to national debts) … may make for a fairer & more equitable economy throughout the West.
Copyright JM Hamilton Publishing 2020
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