Japanese fiscal and monetary policy, which has been failing for the better part of two-and-a-half decades, may have reached a new disappointing low by June 2016. The much-ballyhooed “Abenomics," named after Prime Minister Shinzo Abe, failed to revive growth, wages or even the Bank of Japan's (BOJ) minimal inflation targets. The Japanese economy has made virtually no economic gains since the early 1990s, despite massive and seemingly never-ending government spending packages and monetary easing.
Facing a mountain of debt — not including off-balance-sheet liabilities, the total public and private debt-to-gross domestic product (GDP) in Japan stood at 615% by the end of 2015 — the Japanese government has little choice but to increase taxes and hope that interest rates remain chronically low in order to ease the burden of repayment. While virtually every other central bank in the world posted disappointing results since the Great Recession, the BOJ stands alone in both the duration and depth of its ineffectiveness.
It seems obvious at this junction in time to point out that Abenomics is not working. The prime minister appears to be stuck between admitting that his fiscal measures were a failure and raising taxes with the risk of taking the legs out from under a wobbling economy. A more pressing question is whether the BOJ is now so ineffective and has so few options that it can be considered a failed central bank.
In a June interview, former BOJ executive director Kazuo Momma told Bloomberg he sees “no major risk to compel the BOJ to expand stimulus in the near future as risks in the global economy aren’t increasing.” Given the track record of the BOJ, another stimulus package is not likely to promote growth.
Failures in the 1990s
After the Japanese real estate and stock market bubbles burst in the early 1990s, the BOJ faced what was then its greatest challenge. Over the next decade, the BOJ cut its discount rate from 6 to 0.25% and an accommodating fiscal policy attempted nine separate stimulus packages. By 1997, it was clear that the Japanese economy had still not recovered. Though not called quantitative easing (QE) at the time, the BOJ purchased trillions of Japanese yen in bad commercial paper from member banks.
Failures in the 2000s
When that did not work, Japanese banks received more than 35 trillion yen (2016 yen) in liquidity injections from the BOJ between 2001 and 2004. It also targeted long-term government bond purchases, which lowered yields and helped the Japanese government afford its soaring debts.
Japan experienced some growth after 2004. Unfortunately, like many of the developed markets at the time, much of that growth was centered on illusory asset valuations. All that wealth, and then some, disappeared during the Great Recession.
Failures in the 2010s
Undeterred, the BOJ launched quantitative and qualitative monetary easing (QQE) in 2013. Another 80 trillion yen later, the BOJ began QQE2 in October 2014. By early 2016 and desperate for answers, the BOJ adopted a negative interest rate policy (NIRP). Results have not improved over the subsequent five months.
Backlog of Problems
Research from Hoisington Investment Management Company suggests that government debt begins to impede economic growth significantly once it approaches 250 to 300% of GDP. The evidence shows that at this level of public and private indebtedness the major policy actions lose effectiveness because payments on the debts and overall business confidence become strained. At more than 600%, Japan far exceeds this threshold.
With the prospect of higher business and sales taxes on the horizon, it is reasonable to expect that total spending and investment confidence could fall for Japan in the coming months and years. There has already been a pullback in Japanese bank lending following NIRP in January, and it is very difficult to tell just how many Japanese Banks have compromised balance sheets because the government muddies the statistics.
In early June 2016, the Bank of Tokyo-Mitsubishi UFJ Ltd., part of Mitsubishi UFJ Financial Group Inc. (NYSE: MTU) and Japan’s largest bank, announced that it was considering abandoning the Japanese bond market over concerns about monetary stimulus and BOJ interventions. By the time of that statement, the BOJ was on pace to buy roughly 100 trillion yen worth of bonds — or more than 90% of all newly issued securities in the market.