Abe is leaving office, but Abenomics is here to stay
- The need for aggressive monetary easing, the most radical of Abe’s ‘three arrows’, was appreciated by the Fed and ECB even before Covid-19 struck. Given a boost by the pandemic, Abe’s experiment is now the norm in the world’s major economies
His signature programme – a three-pronged plan involving aggressive monetary easing, fiscal expansion and structural reforms, designed to rescue Japan from two decades of near stagnation and on-and-off deflation – enthralled financial markets when it was launched shortly after Abe became prime minister for the second time in December 2012.
For a while, Abenomics seemed to be working wonders. In 2014, Japan’s headline inflation rate briefly surpassed 3 per cent, exceeding the 2 per cent target and a 23-year high. What is more, the yen fell dramatically in the years following Abe’s return to office, proving a boon to Japan’s exporters. Yet, policy blunders and external shocks undermined the credibility of the programme, casting doubt over its design and implementation.
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Japan’s Prime Minister Shinzo Abe resigns for health reasons
However, the coronavirus crisis has given Abenomics a new lease of life. Not only is the programme unlikely to be reversed – given that Kuroda, who has made his mark pursuing aggressive monetary easing, is only halfway through his second term – the first two arrows have been embraced wholeheartedly by leading policymakers across the globe.
Since the Covid-19 pandemic erupted, central banks in the United States and Europe have been just as bold as Japan was when it launched the world’s most aggressive bond-buying programme in 2013. Shock and awe have become the norm as the big central banks go “all in” to counter the economic fallout from the coronavirus.
Americans must, in the end, pay for their Covid-19 stimulus
What is more, the Federal Reserve and the European Central Bank have joined their Japanese counterpart in moving into uncharted territory. In April, the Fed crossed a Rubicon by announcing plans to buy high-yield, or “junk”, bonds, while the ECB loosened rules to accept the debt of so-called “fallen angels” – bonds of companies that lost their investment grade rating due to Covid-19 – as collateral in its liquidity operations.
Indeed, the policies that Abe’s government pursued were applicable to other major economies long before the pandemic struck.
In the euro zone, the threat of “Japanification” – a dangerous mix of excessively low bond yields, weak growth and persistently low inflation – has stalked the bloc for years. Despite the introduction of negative interest rates in 2014, the euro zone’s core inflation rate, which strips out volatile food and energy prices, has failed to exceed 1 per cent – half the ECB’s target – for a significant period, and now stands at 0.4 per cent.
Even America’s previously buoyant economy was beginning to look a tad Japanese, with the Fed’s preferred measure of inflation stubbornly below target and the yield on benchmark 10-year Treasury bonds continuing to fall since the financial crisis.
Although advanced economies, in particular Japan, were already heavily indebted before the pandemic erupted, Abenomics has shown that any hint of fiscal restraint at a time when massive stimulus is needed can prove costly.
Even if global policymakers heed the lessons of Abenomics, the market reaction is not necessarily a positive one. The plunge in the dollar – which stems mainly from the Fed’s decision to cut its benchmark rate to zero – has contributed to a surge in the euro, forcing the ECB to try to talk down the currency as it struggles to stimulate inflation.
The rise of Abenomics contributed to currency wars. That these tensions are flaring up again makes it more likely that other countries will be as bold as Japan was in the hope of reaping the benefits of aggressive stimulus.
Nicholas Spiro is a partner at Lauressa Advisory
