Abenomics is often described as having three arrows:
1. Monetary stimulus
2. Fiscal stimulus
3. Structural reform
There’s no point in even discussing fiscal stimulus, as they just increased their sales tax by 300 basis points. Another 200 basis point rise is coming in a few years. There isn’t going to be any meaningful fiscal stimulus. Structural reform may or may not occur in Abe’s second term—we’ll have to wait and see. So for now, it’s all about monetary stimulus.
There are two reasons not to ask how Abenomics is doing. It’s not clear what Abenomics is, and it’s not clear what it is trying to achieve. So let’s simplify things and ask how the monetary stimulus arrow is doing. Now we have only one unknown; what is monetary stimulus trying to achieve?
Monetary stimulus is not trying to achieve a higher trend rate of real GDP growth. Monetary policy can’t do that. Structural reform might be able to boost RGDP growth over time, but the reforms haven’t yet been enacted. If we are talking about monetary stimulus, then it makes more sense to consider these three goals:
a. Economic recovery—reducing unemployment to roughly the natural rate
b. A 2% inflation target
c. An improved fiscal situation
The unemployment rate has fallen during the period of Abenomics—which ironically began even before he was elected in early 2013. The yen started falling in the forex markets in late 2012, as soon as Abe announced his platform (he was widely expected to win easily.) Lower unemployment is a plus. How about the fiscal situation?
Here’s the Financial Times:
Since becoming prime minister a little more than two years ago, Shinzo Abe has forced the central bank to adopt more radical yen-weakening policies to spur inflation while allowing the first rise in consumption tax since 1997.
Such measures are aimed at containing the government’s vast debts, which have swelled to more than twice the size of the economy amid rapidly rising payments for health and social security.
Abenomics has improved Japan’s fiscal situation. A combination of higher corporate profits and the 3 percentage-point consumption tax increase last April seems set to push tax receipts to a 22-year high in the next fiscal year.
This puts the government on course to meet a pledge to halve the gap between what it spends (excluding debt-service costs) and what it collects in tax, as a percentage of gross domestic product.
The finance ministry wants to eliminate that deficit altogether by 2020 — a commitment likely to require big cuts in social security spending, as well as another 2 percentage point increase in consumption tax in April 2017.
So they are on course to improve their fiscal situation. Another plus.
As I expected, they are falling short on their 2% inflation goal (although Japan is at least out of deflation). It remains to be seen whether the BOJ will persevere until they hit the 2% inflation target.
Of the three goals mentioned above, the 2% inflation target is the least important. So the monetary stimulus is a modest success. Why then is Abenomics often viewed as having failed? Because monetary stimulus is only one of the three arrows. Yes, it can do everything that fiscal stimulus could have done (if tried), but it can’t raise the trend rate of RGDP growth in Japan. Because Japan’s working age population is falling at 1.5%/year, trend RGDP growth is roughly zero. Many people look to RGDP growth when judging the performance of an economy, and by that criterion Abenomics has failed.
As the post title implies, it makes no sense to ask how Abenomics is doing. That mixes up unrelated issues, such as policies enacted that may or may not have worked, and policies that were not enacted for political reasons. As an analogy, one of my commenters recently mixed up two types of monetary policy impotence; inability of the central bank to boost AD, and inability of more AD to boost RGDP. It’s important to always be very clear on which problem you are analyzing.
To summarize, Abe’s nominal policies have improved things, and the supply-side (structural) policies were never tried.
PS. Simon Wren-Lewis responded to my recent Econlog post. In the comment section over at Econlog, Rajat anticipated what I would have said:
Wren-Lewis has responded: http://mainlymacro.blogspot.com.au/2015/01/faith-based-macroeconomics.html
Most of it seems besides the point. I’m not sure what levels of government consumption and investment imply about ‘austerity’, which presumably also captures cuts to transfer payments and tax increases.
I pointed out that the “year of austerity” in the US began on January 1st, 2013, and hence that you would want to look at Q4 over Q4 figures growth figures. He responds with government output data. Very convenient, given that the austerity that began on January 1st took the form of increases in both income and payroll tax rates. Sequester came later in the year, and even that included cuts in transfers (which are not output). Wren-Lewis never even addressed my other two criticisms.
Wren Lewis also implies that I believe that “fiscal policy never matters much.” I actually believe that demand-side fiscal policy doesn’t matter much when a country has an independent monetary policy and targets an aggregate like inflation or NGDP. I thought that was the standard view in macroeconomics. (Now Wren-Lewis calls it “faith based”.) But even then, supply-side fiscal policy like employer-side payroll tax cuts (advocated by Christy Romer and me) and VAT cuts can be effective.
Marcus Nunes also has a good post.