Zombie Abenomics

Japan's Missing Economic Revival

A foreign exchange trading company in Tokyo, November 12, 2014. Toru Hanai / Courtesy Reuters

Japanese Prime Minister Shinzo Abe’s economic revival is hardly going as planned. A consumption tax hike that he introduced in April triggered a recession over the following six months, prompting him to announce the delay of the second hike, from October 2015 to April 2017. In his November 18 press conference, he also vowed to make no further postponements, to dissolve the Japanese parliament, and to hold a snap election to gain a mandate for his economic plan.

The tax delay is unquestionably necessary. Before the first hike, the Ministry of Finance and the Bank of Japan had blithely promised Abe that Japan would see only a mild and short-lived response, which proved disastrously wrong. Just as wrong were their warnings that any delay in the second hike would cause stock prices to crash and interest rates to spike. In reality, the first sign of a possible delay sent stock prices to seven-year highs. Meanwhile, the Bank of Japan has easily kept interest rates at near-record lows, not only for 10-year bonds but also for 30-year and 40-year bonds. 

The real question is this: If Abe’s strategy, known as Abenomics, is such a miraculous revival plan, why was the delay necessary? And, given Abe’s track record, why should anyone trust his guarantee that he will make the economy strong enough by 2017 to weather another tax hike? Healthy economies are not thrown into recession by relatively small hikes in a consumption tax from five percent to eight percent, but Japan’s was—indicating that it isn’t healthy and that Abenomics has done little to help. 

In some ways, Abenomics has made the situation worse. It’s not just the tax hike. There is also the 30 percent yen depreciation that Abe encouraged as a way to increase exports. Just as I discussed in my recent article for Foreign Affairs, because Abe left many structural competitive problems unaddressed, the depreciation has done nothing of the sort, spurring no real growth at home. Instead, price hikes

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