Why ‘Abenomics’ Keeps Missing The Mark by [email protected]

Japan Continues to Struggle under ‘Abenomics’

Standard & Poor’s recently cut its long-term credit rating of Japan one level, down to A+, and markets do not seem to have reacted much, if at all. A key reason is that many Japanese bonds are owned by Japanese banks and other Japanese institutions, “which are not going to sell in large numbers,” says Wharton finance professor Franklin Allen.

But the move is one more straw in the wind pointing to how ineffective so-called Abenomics has been, he adds. It also comes at a time when there is other negative news for Japan. Wage growth bogged down in August along with industrial production, which fell half a point following a nearly identical drop in July. As Allen notes in parts one and two of this Knowledge in 5 interview, China’s slowdown is hurting many Asian exporters, and in Japan it appears to be offsetting at least some of the hoped-for effects from the “Abenomics” stimulus plan — a plan never destined to soar, says Allen.

An edited transcript of the conversation appears below.

[email protected]: Standard & Poor’s recently cut the long-term credit rating of Japan one level down to A+, and markets do not seem to have reacted much, if at all. What do you think implications will be from this cut? Is it a signal that maybe Abenomics is not doing so well – that perhaps it has already failed?

Franklin Allen: I was always fairly pessimistic about the likely success of Abenomics, and I think that is what we are seeing, that it is not really working very much. They did manage to devalue the currency significantly in a short space of time and I think most of the effects we have seen have been the result of that, rather than sustained takeoff of growth and so forth.

They have still got the basic problems they have had for many years, which are: demographic issues, a very low or negative growth in the population; a lot of debt; and a little bit of deflation — they have not managed to get inflation up in any sense and that is likely to continue. So those issues are still there, and some way or another they have to deal with them.

Whether they will deal with them without some type of crisis is becoming more problematic. And that is why I think we may see some deterioration in other indicators. [Editor’s note: Recent reports suggest Japan is close to a technical recession after industrial production unexpectedly fell 0.5% for August. Then on October 5, the government announced that wage growth also slowed in August, which will be a drag on hopes that government policies can increase consumer buying power. Though corporate profits are up, companies have been reluctant to raise salaries much out of concern over the sustainability of economic growth.]

The effect on market yields and so on [from the S&P downgrade] is not likely to be big, because [many bonds and related financial instruments] are owned by banks and other institutions, which are not going to sell in large numbers. They are not going to take their money out of the country. So I wouldn’t put much weight on the fact that there was not much movement [in markets, following the announcement]. But I think Japan still has a lot of problems, which Abenomics has not managed to solve.

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