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Abenomics on ropes as reform arrow, BOJ ‘bazooka’ misfire

by and

Staff Writers

As Tokyo stocks tumbled further Friday, dragging the Nikkei average to its first close below 15,000 since October 2014, economists asked: Is Abenomics out of options?

Prime Minister Shinzo Abe has relied heavily on ultra-aggressive monetary easing to weaken the yen and boost exporters’ profits in his quest to end deflation. The campaign was a boon for the stock market, raising prices, benefiting rich investors and cementing Abe’s power base.

The resurgent yen and the stock plunge will be painful for his administration, which has failed to come through on structural reforms, but many say the more serious issue is the Bank of Japan’s helplessness.

The BOJ’s surprise announcement on Jan. 29 that it planned to adopt a negative interest rate failed to stem the trend — the Nikkei continued to tumble and the yen strengthened to the 110-level overnight on Thursday.

Economists largely attribute the losses to external factors, notably China’s economic slowdown, simmering anxiety in the eurozone and the U.S. Federal Reserve’s apparent reluctance to raise rates as earlier planned. But the turmoil has shown the limits of what the BOJ can do by itself, as its options for further monetary easing may run out, said Izuru Kato, chief economist at Totan Research Co.

The BOJ has been buying up massive amounts of Japanese government bonds, to the tune of ¥80 trillion a year. It currently possesses about 30 percent of JGBs, and at the current rate its holdings will exceed one in two by the end of fiscal 2017.

The purchase of all JGBs — a theoretical possibility — would mean the removal of its main pillar of monetary easing.

“If the BOJ increases the amount of JGBs it buys, the limit will come even closer,” Kato said. “The BOJ decided to introduce the negative rate because it needs a different kind of approach.”

The minus 0.1 percent rate on some cash holdings, which takes effect Tuesday, has mainly delivered a “negative surprise,” Kato said. The Nikkei rallied to close at 17,865 the next day, but gave up its gains just a few days later.

This is in sharp contrast to Bank of Japan Gov. Haruhiko Kuroda’s blasts of monetary easing in April 2013 and October 2014 — dubbed his “bazooka” — which spurred stocks and depressed the yen.

“This time, the surprise effect disappeared instantly,” lawmaker Motohisa Furukawa of the Democratic Party of Japan told a session of a Lower House finance committee on Friday.

Furukawa said Kuroda, who met with Abe on Friday, contributed to the market’s response by failing to communicate with its players.

Kuroda seemed to have made a U-turn. Only on Jan. 21, eight days before the shock rate announcement, he told an Upper House session that he was not considering imposing negative rates.

“The governor has kept saying that dialogue with the market is very important. But he just did what he said he wouldn’t only a week or so ago,” Furukawa said. “This distrust may be another cause of the instability in the market.”

Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities, said he was surprised by the announcement, given Kuroda’s earlier testimony. Still, Shimanaka said market players are “reacting excessively” to bad news from overseas and the rumored but unproven side effects of the negative interest rate plan.

“The real economy is not that bad actually,” Shimanaka said. “It’s too early to say Abenomics is over.”

Finance ministers and central bankers of the Group of 20 are slated to meet in Shanghai on Feb. 26 to 27.

At any rate, the crisis is a wake-up call for Abe, who many economists say has relied too heavily on monetary easing for the past three years.

Abenomics originally consisted of three “arrows” — the other two being fiscal spending and structural reforms.

Monetary easing was originally considered a temporary measure to buy time for structural reforms, but many economists say Abe has failed to make significant progress in that area.

On Jan. 22, 2013, the Abe administration and the BOJ jointly declared a new inflation target of 2 percent. The previous governor, Masaaki Shirakawa, had long resisted Abe’s calls for this.

The government simultaneously pledged to promote “structural economic reforms” to raise Japan’s competitiveness and growth potential through investment, deregulation, and tax reforms.

These, Kato said, remain unfulfilled.

  • Liars N. Fools

    Don’t wait for American approval of TPP. Fire the third arrows now.

    • texastea

      The Republican congress will never pass the TPP. Especially if a Republican is elected president. Better fire those arrows (if Abe has the guts to do it).

  • Firas Kraïem

    It is increasingly clear that there is no third arrow, and never was. The monetary easing bought time for the state secrets and security laws, and currently for the constitutional revisions.

  • Ritchie Sato

    The solution to the Japanese and in fact the global ‘Depression’ is written in history, as was the making of this current financial situation. the BOJ can print as much ‘stimulus’ money it wants, however injecting it into the banking system is a complete waste of time, if the BOJ and or the Govt of Japan really want to defeat stagflation/depression, it must use the stimulus money in a way where the money will be used eg: where a doctor administers adrenaline to a heart attack patient not to the patients clothing, sounds strange so I will explain further, the stimulus money (adrenaline) should be administered at worker household level, what do the working class do…….. they spend, on items as varied as a new washing machines, tv’s to school shoes, clothing, that is where the money goes, the velocity is slowed down into the hands of people wanting the good things in life for themselves and their families……… this in due course creates employment, inflation and a nation a lot happier than it has been, under a series of Japanese Governments, that have not a clue in how to solve this economic malaise.

  • solodoctor

    Fiscal spending and structural reform have never really been done. Abe has relied on the BOJ to do all the heavy lifting while he has asked corporations to voluntarily hire more women, raise wages, hire more people to permananet fulltime jobs, etc. It’s all been a lot of talk but no real action while Abe has focused on new security laws, CSD, and reinterpreting the Constitution. It should have been called Kurodanomics because he is the one who has done all the work. None of this has translated into more Yen in the average worker’s purse. So, demand in the economy has not grown.

    Either Abe does not really understand basic marcoeconomics or he doesn’t care. Will the DPJ be able to field enough credible candidates to eliminate the LDP’s majority in the coming election? Not likely. So Abe can continue to stumble along.

    • Ron Lane

      “Either Abe does not really understand basic marcoeconomics or he doesn’t care.”

      Am I being overly cynical if I say Abe doesn’t give a sh*t about the economic well-being of this country? I’m afraid his only concern from the beginning has been the passage of State Secrecy Laws, Collective Self-Defense Laws and the revision of the Constitution. In other words, it’s all been “bait and switch.” Or a “con.” Choose your poison.

    • Ron Lane

      “Either Abe does not really understand basic marcoeconomics or he doesn’t care.”

      Am I being overly cynical if I say Abe doesn’t give a sh*t about the economic well-being of this country? I’m afraid his only concern from the beginning has been the passage of State Secrecy Laws, Collective Self-Defense Laws and the revision of the Constitution. In other words, it’s all been “bait and switch.” Or a “con.” Choose your poison.

      • JSS00

        That’s probably true, in Abe’s mind, he thinks that everything will become magically better as soon as he revises the constitution.

  • Christina Tsuchida

    Is this wacko: Are we in Japan victims of a hedge-fund conspiracy? 1st, people buy yen with dollars, inflating its price. This automatically lowers our stock prices in yen.
    (Yet the yen, as higher, keeps their value similar? Anyway:)
    2nd, hedge-funders move in to buy up our companies cheaply, with the yen they have been hoarding. Remember what happened to Indonesia, before Obama’s era?
    Am I just stupid on this?

  • Christina Tsuchida

    Is this wacko: Are we in Japan victims of a hedge-fund conspiracy? 1st, people buy yen with dollars, inflating its price. This automatically lowers our stock prices in yen.
    (Yet the yen, as higher, keeps their value similar? Anyway:)
    2nd, hedge-funders move in to buy up our companies cheaply, with the yen they have been hoarding. Remember what happened to Indonesia, before Obama’s era?
    Am I just stupid on this?

  • Aholl Urang

    How much rotten sushi must be fed to the people until it wakes up to the smell of lunacy?

  • JSS00

    Abenomics is over! Why did anyone think that this would work?

  • LaughingBuddha

    There have been more than three arrows. None worked.

  • GBR48

    Abebomics initiated a stock price bubble. We all know what happens when a bubble bursts. The Nikkei may go down a bit more or stablise, and then eventually will crawl back up again, boosted by several ‘good days’ with larger gains.

    It’s never the end of the world. Folk shift to defensive stocks or safer investments, wait, and try to jump back in at the right time. When the media talks of a recessionary plunge, it’s just a normal day at the office for the financial markets, who have seen it all before and know the drill.

    We probably need to lose the ‘drama queen’ mentality every time this happens, because it has before and it will again, like a heartbeat.

    Meanwhile, the companies listed carry on doing their thing. The stock exchange is manipulated by artifical external acts like a gaming table, so there is rarely much association between stock prices and real value.

    Even the negative interest rate isn’t that dramatic, as it has already been used by the ECB. It does indicate a degree of desperation to manage a flawed system, but we already knew none of this was working very well, and that the sums don’t add up. The wealthier are increasing the amount of the world’s liquidity that they own, and the remainder (99% of people and nation states themselves) are starting to find the financial air to be a bit thin. The parasites are sucking way too much blood from their hosts, for things to be sustainable.

    The difference here, specifically in Japan, as that the stock price bubble of Abenomics was designed to take the pain out of structural reform within Japan Inc. A bribe, if you like. Here’s some free money, now please sort out all your failings so that you start to deliver real profitability and the government and the banks don’t have to keep supporting you when you screw up (Sharp etc).

    It was a reasonably solid plan, but Japan Inc. just accepted all the benefits, did a tiny amount of superficial window dressing, thanked the government for the free money, and carried on regardless.

    In other countries where this has happened, governments have tried to apply a bit more pressure. In the UK, the right-wing government are enforcing a larger than usual hike in the platry minimum wage, so that the state doesn’t have to subsidise companies’ wage bills, by paying out welfare support to low-paid employees. As you might expect, companies are whining like crazy about it, suggesting that the sky will fall in.

    Whether Abe can get tough on Japan Inc., when Japan Inc. support the LDP with (legal) donations, and given the links between the LDP and wealthy and powerful of Japan, is another matter.