Japan's Last Chance

Stephen Roach takes a look at Japan’s most recent attempt to spend its way to prosperity:

Abenomics, with its potentially powerful combination of monetary and fiscal stimulus, coupled with a wide array of structural reforms, was supposed to end Japan’s “lost decades.” All three “arrows” of the strategy were to be aimed at freeing the economy from a 15-year deflationary quagmire.

Unfortunately, not all of the arrows have been soaring in flight. The Bank of Japan seems well on its way to delivering on the first one – embracing what it calls quantitative and qualitative easing (QQE). Relative to GDP, the BOJ’s monetary-policy gambit could actually far outstrip the efforts of America’s Federal Reserve.

But the flight of the other two arrows is shaky, at best. In recent days, Abe has raised serious questions about proceeding with the second phase of a previously legislated consumer-tax hike that has long been viewed as the linchpin of Japan’s debt-consolidation strategy. Abe has flinched because the economy remains weak, posing renewed risks of a deflationary relapse. Meanwhile, the third arrow of structural reforms – especially tax, education, and immigration reforms – is nowhere near its target.

Abenomics, one might conclude, is basically a Japanese version of the failed policy combination deployed in the United States and Europe: massive unconventional liquidity injections by central banks (with the European Central Bank apparently now poised to follow the Fed), but little in the way of fundamental fiscal and structural reforms. The political expedience of the short-term monetary fix has triumphed once again.

I think it’s safe to conclude that politicians — and this is universal, not unique to Japan — will never undertake serious political or economic reform, so long as they’re allowed to take the easy way out of printing money.

Printing money feels good, it’s easy to achieve, and it provides effortlessly the illusion of prosperity. Real reform means pushing even your friends off of the gravy train and forcing even the most entrenched business interests to compete. That makes for unhappy power brokers — the only real anathema to progressive political leaders.

So it’s free money for everybody forever. But as Heinlein wrote, anything free is worth what you pay for it — you just don’t find out until later.

Well, it’s later than they think.