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Old July 27th, 2013, 09:34 AM   #1
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Abenomagic chickens will eventually come home to roost

1. Following are excerpts from the article headlined Shinzo Abe?s Monetary-Policy Delusions by Stephen S. Roach - Project Syndicate

(Begin excerpts)
....But will it work? While experimental monetary policy is now widely accepted as standard operating procedure in today’s post-crisis era, its efficacy is dubious. Nearly four years after the world hit bottom in the aftermath of the global financial crisis, QE’s impact has been strikingly asymmetric. While massive liquidity injections were effective in unfreezing credit markets and arrested the worst of the crisis – witness the role of the Fed’s first round of QE in 2009-2010 – subsequent efforts have not sparked anything close to a normal cyclical recovery.

The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.

The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles – property and credit – fueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.....

Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. But it has also lost sight of the 1990’s – the first of its so-called lost decades – when the authorities did all they could to prolong the life of insolvent banks and many nonfinancial corporations. Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged, that Japan made progress on the long, arduous road of balance-sheet repair and structural transformation.

US authorities have succumbed to the same Japanese-like temptations. From quantitative easing to record-high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance-sheet repair and structural adjustment. As a result, America has created its own generation of zombies – in this case, zombie consumers....

Is this the “cure” that Abe really wants for Japan? The last thing that the Japanese economy needs at this point is backsliding on structural reforms. Yet, by forcing the BOJ to follow in the misdirected footsteps of the Fed and the ECB, that is precisely the risk that Abe and Japan are facing.

Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow. (End excerpts)

2. Following are excerpts from the article headlined The Wrong Growth Strategy for Japan by Martin Feldstein - Project Syndicate

(Begin excerpts)
CAMBRIDGE – Japan’s new government, led by Prime Minister Shinzo Abe, could be about to shoot itself in the foot. Seeking to boost economic growth, the authorities may soon destroy their one great advantage: the low rate of interest on government debt and private borrowing. If that happens, Japanese conditions will most likely be worse at the end of Abe’s term than they are today.....

The yen’s weakening will mean higher import costs, and therefore a higher rate of inflation. An aggressive BOJ policy of money creation could cause further weakening of the yen’s exchange rate – and a rise in domestic prices that is more rapid than what Abe wants.....

The combination of exploding debt and rising interest rates is a recipe for economic disaster. The BOJ’s widely respected governor, Masaaki Shirakawa, whose term expires in April, summarized the situation in his usual restrained way, saying that “long-term interest rates may spike and have a negative effect on the economy.”

A spike in long-term rates would lower the price of JGBs, destroying household wealth and, in turn, reducing consumer spending. The higher interest rates would also apply to corporate bonds and bank loans, weakening business investment....

Abe is right about one thing: Japan needs to get out of its no-growth and deflationary trap. But the policies that he favors are not the way to do it. (End excerpts)

3. Following are excerpts from the article headlined The dark side of Abenomics | The Japan Times

(Begin excerpts)
....But people should not be duped by the government’s public relations efforts. The dark side of Abenomics is raising its head. Stock prices have started to show erratic fluctuations. Institutional investors have made profits, but ordinary citizens are in no position to benefit from the stock market.

The fairly cheap yen, compared with the level prevailing during the days of the Democratic Party of Japan government, has helped improve the performance of export-oriented businesses. But the price rises of imported fuel and raw materials are translating into high electricity charges and high prices for food items. The government should give priority to stabilizing people’s lives and should flexibly cope with volatile economic conditions....

There is no prospect that workers’ wages will rise. The Abe administration’s policy to achieve a 2 percent inflation in two years is likely to result in price rises without wage increases, and could even create economic bubbles.

Mr. Abe and other government officials should be aware that their economic policy could wreak financial havoc on many households, which in turn would stall domestic recovery. They should take steps that will create jobs and boost wages. (End excerpts)

4. The so-called Abenomics reminds me of a street magic performance I witnessed some years ago. In the performance, the street magician put a US$1 note under a handkerchief. After muttering some mumbo-jumbo and waving a wand to and fro over the handkerchief, he lifted the handkerchief and voila…the US$1 note had changed into a US$10 note! The audience were spellbound and greeted his magic performance with rapturous applause.

Next, he performed the same ritual with the ten-dollar note, changing it into a US$100 note. His magic performance was again greeted with thunderous applause from the audience. After changing the hundred-dollar note into a US$1,000 note, he passed his hat around. A beggar approached him from the crowd, saying: "Sir, if you can change this one-dollar coin of mine to a thousand-dollar note, I will donate half of the money to you."

Staring at the beggar with a smile, the street magician said: "Sorry, it's my rule not to perform any magic with other people's money."

At most ten years later, the chickens will surely come home to roost for the so-called Abenomics. The next guy who took over premiership from him would have a hard time clearing up all the mess left by Abenomics. However, this doesn't matter for Shinzo Abe. Like the street magician walking away at the end of his performance, he will just exit the political stage, laughing at the "audience" who were spellbound by his "magic".

Shinz? Abe - Wikipedia, the free encyclopedia

Shinzo Abe Biography (Political Leader) | Infoplease.com

Is Abenomics failing? Here?s what you need to know about Japan.

Abenomics and Asia by Lee Jong-Wha - Project Syndicate

Street magic - Wikipedia, the free encyclopedia

Last edited by reedak; July 27th, 2013 at 10:17 AM.
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