Japan’s irrational terror of “deflation” encouraged Japanese voters to favour Prime Minister Abe’s experiment with “reflation”—an experiment being performed on an unprecedented scale.
Economist Ludwig Von Mises used to say trying to “reflate” the money supply after a catastrophic deflation was like reversing your car over someone after just running them down, and thinking that would make them feel better.
Japan is where the Keynesian economic model rubber hit the road. In April 2013, the Bank of Japan announced a staggering $1.4 trillion QE program.
In today’s world of Central Banking madness, $1.4 trillion no longer sounds like an insane amount. So let me put this number into perspective…
$1.4 trillion is…
- The equivalent of 24% of Japan’s total annual economic output.
- Enough to fly every human being in Japan to California for a 2-week vacation.
- The equivalent of writing a check for $11,200 to every man, woman, and child in Japan.
Moreover, with $1.4 trillion, you could…
- Buy Australia’s entire economic output for a year.
- Fund NASA for the next 82 years.
- Treat every person on the planet to a $200 five-star dinner at one of New York’s top restaurants.
The program however has been a complete failure. Japan’s GDP growth accelerated for only two quarters before turning down again. The misery index in Japan has hit a 33-year high as households were crushed by rising prices.
Even exports, which were supposed to be the primary beneficiaries of a weakening Yen, have tanked. According to CLSA, real exports remain 16% below the 2008 peak in real terms. Sony, the once great electronics giant of Japan slashed its profit outlook by 70% and cancelled its dividend for the first time in 50 years.
In simple terms, Abenomics has failed to revitalise Japan. In very specific terms, a single QE program equal to over 24% of Japan’s GDP FAILED to generate sustainable growth in GDP, jobs, or even exports.
So what did the Bank of Japan do?
It increased its QE efforts.
It is now clear that Central Banks will do absolutely anything but admit failure.
Anything but challenge their faith-based model.
When evidence meets faith, it doesn’t stand a chance.
When a year and a half of aggressive quantitative easing failed to produce a recovery in private demand for funds, the government should have realized that the answer to the economy’s problems was not in monetary policy and shifted its focus to the second and third arrows of Abenomics.
But the reflationists in academia and bureaucracy who are unable to accept that monetary policy is powerless in a balance sheet recession have basically said that if one pill doesn’t cure the patient, try two, and if two don’t work try four, 16, 256....
Most patients would start to question the doctor’s diagnosis before they agreed to swallow 256 pills. But such voices have been erased from Japan’s policy debate….
For those who believe monetary policy is always effective, no amount of evidence that there are times when monetary policy does not work will convince them otherwise.
Ironically, instead of boosting the economy, Abe's latest lunacy will merely lead to even greater Japanese economic devastation and the inevitable quadruple dip. That, or an outright economic depression, one from which the country will not emerge.
Oh, and from the Herald this morning: ‘NZ dollar soars to 7-year high against weak yen.’
“Soaring” being a relative thing in a currency war.