In what is undoubtedly a poor reflection on so-called “Abenomics,” the ambitious, stimulus-packed economic program of Japanese Prime Minister Shinzo Abe, the Japanese economy sank back into recession during the third quarter.
An official recession is judged to be two consecutive quarters of economic contraction. In Japan, the economy contracted by 0.8% during Q3. This followed the second quarter where the economy shrank by 0.7%. By this official definition, this is the fourth recession for the Japanese economy in just five years.
The Three Arrows of Abenomics
The fact that Japan is once again experiencing recession is an enormous blow to the government, which has continually touted its economic plans as a panacea for an economy that has struggled with persistent deflation since the turn of the 21st century.
The government’s ambitious plan to reinvigorate the economy, “Abenomics,” was built upon the idea of “three arrows.” It’s a metaphor for the three main areas that the quantitative-easing-style program was targeting: 1) monetary stimulus (i.e. lower rates and more money printing); 2) fiscal stimulus (i.e. increasing government spending, making it an even bigger part of the economy); and 3) economic reforms.
So far, the monetary and fiscal stimulus have been aggressively pursued by PM Abe and the Bank of Japan, but the “third arrow” has been conspicuously left out. Reform is always a difficult proposition; it requires a political solution to problems that are oftentimes highly partisan. However, it seems odd that even the architects of Abenomics would think their easy-money economic plan would work in the absence of 1/3 of its commitments.
Losing the Long Battle With Deflation
Japan has been stuck in a never-ending deflationary spiral since the country’s stock market crashed in 1989. For more than 25 years, the country has seen next-to-nothing in terms of inflation despite massively growing its money supply to unprecedented levels. Keep in the mind that the Japanese yen currently trades at over 123 per dollar, and is on pace for its weakest yearly average against the USD since 2002.
This may turn out to be the strongest indictment against QE and similar forms of monetary stimulus. If Japan’s economy doesn’t turn around, it will be the nail in the coffin for Abenomics as a failed policy. While Japan has far outpaced its counterparts in Europe and America when it comes to stimulating the economy through government intervention, it does point toward the EU and the U.S. experiencing the same mediocre results from their own QE programs.
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