Japan has often been touted as the most successful recovery for a developed economy since the recession of 2008. Many economists have laid the benefit of Japan’s recovery at the feet of Prime Minister Shinzo Abe, calling Japan’s economic recovery “Abenomics”. I recently read an article about Japan’s that I found to be particularly interesting. Before the recession, Japan had been going through massive deflation. The interest part about this, is that for 15 years, prime ministers, finance officials and lawmakers have told the public that it was the Bank of Japan’s fault for not doing more. This thinking led Shinzo Abe to hire Haruhiko Kuroda to run the central bank. It was Kuroda’s decision to implement the very things Abenomics is being praised for. With Kuroda at the head, the Bank of Japan rose the monetary base to 270 trillion yen. Unfortunately, like many other easing programs in the post recession world, the increase in the monetary base did not lead to the increase in living standards even though the Yen has fallen 20%. The failure of the increased monetary base illustrates that Japan’s problems can’t be solved by just monetary policy. Japan’s aging population and China’s raising influence are examples of influences that monetary policy can’t solve. It is unfair to criticize Japan’s BoJ policies if fiscal policy isn’t being implemented as well.
This past week, the head of the BoJ called on the prime minister of Japan. The lack of the increase in exports illustrates how the Prime Minister needs to look at lowering corporate tax rates, lowering trade barriers, stimulating innovation and opening the labor markets. The Bank of Japan is still likely to hit its 2% inflation target and with rates being close to the zero bound, its now the governments time to act. Kuroda is worried that if the government doesn’t take fiscal action, “the long term interest rates will rise out of line with economic fundamentals”. This coupled with Japan’s widening trade gap, illustrate increasing problems that the Bank of Japan have very few resources left in its arsenal without fiscal help. Without the fiscal help, Japan could see a flight of foreign capital that could remove the 57% increase of the Nikkei that Japan witnessed this past year. Until the Bank of Japan has the ability to use negative interest rates, I believe that the government needs to step in to increase domestic production since the low interest rates have not helped as much as necessary.