Abenomics

A Japanese Quantitative Failure

Just a few weeks after he took office in December 2012, Japan’s new Prime Minister Shinzo Abe announced his plan to enact new policies with the goal of jump starting a stagnant economy that was having massive deflation issues. For years, Japan has been wrangled with deflationary problems despite numerous efforts to rejuvenate the economy and Prime Minister Abe’s new plan, nicknamed Abenomics, aimed to ensure long term sustainable growth in the world’s third largest economy through three components or “arrows”. The first arrow was to engage in an immense quantitative easing program to help increase inflation to a two percent annualized target rate, the second was to implement fiscal stimulus programs, and the third was to carry out a series of structural reforms in order to enable more efficient use of capital and resources within the Japanese economy. The Bank of Japan, Japan’s central bank, launched its plan in form of quantitative easing, a technique in which the central bank pumps money into the economy to buy bonds from financial institutions, and lowering interest rates so citizens can afford to borrow money and eventually spend money to boost a lagging economy. Japan’s first wave of quantitative easing began in April 2013, with a promise to buy about $70 billion in bonds each month. The plan was highly successful in its first year as the benchmark stock index had its biggest gain in forty years in 2013. Through his QE plan, Abe’s goal was to depreciate the yen and while it was initially successful, a year and a half later they still had not reached their two percent inflation annualized target rate and in a surprising decision, the Bank of Japan announced an expanded plan to pump out an additional $60 billion per month starting in November 2014. An increase in spending by that amount of money would seem to be a panicked move and an admission that the economic growth and inflation levels have not increased as much in Japan as...