Abenomics appears to have Failed in Japan just as Keynesian Economics has Failed everywhere it has been Tried

Posted by PITHOCRATES - March 9th, 2014

Week in Review

The Keynesians were applauding Shinzō Abe’s economic plans for Japan.  To end the never-ending deflationary spiral they’ve been in since the late Nineties.  His Abenomics included all the things Keynesians love to do.  And want to do in the United States.  Expand the money supply through inflationary monetary policy.  Devalue the yen to make their exports cheaper.  Lower interest rates into negative territory.  Quantitative easing.  And lots of government spending.  The kinds of things that just makes a Keynesian’s heart go pitter pat.

They kicked off Abenomics in 2013.  And how are things about a year later?  Not good (see Japan’s deficit hits record as economic growth slows posted 3/9/2014 on BBC News Business).

Japan’s current account deficit widened to a record 1.5tn yen ($15bn; £8.7bn) in January, the largest since records began in 1985.

In further bad news, the country’s economic growth figures were also revised downwards…

The sluggish growth and growing deficit come just before a planned sales tax increase, scheduled to take effect in April.

They did weaken the yen.  Making it worth less than other currencies so those currencies could get more yen when they exchanged their currencies to buy those Japanese exports.  Of course, when Japanese exchanged their yen for those other currencies they got less of those other currencies in return.  Requiring more yen to buy those now more expensive imports.  Thus increasing their trade deficit.

Japan is an island with a lot of people.  They have to import a lot of their food, energy and natural resources as they have little on their island.  So the weaker yen just made everything more expensive in Japan.  Which, of course, lowered GDP.  As those higher prices reduced the amount of buying their consumers could do.

Japan’s greatest problem is her aging population.  And they have just about the oldest population in the world.  As the youth have slammed the brakes on having children.  So you have massive waves of people leaving the workforce the government is supporting in retirement.  And fewer people entering the workforce to pay the taxes that support those retirees.  Which, of course, forces higher tax rates on those remaining in the workforce.  Further reducing the amount of buying their consumers can do.  And no amount of Abenomics can change that.

Abenomics did not deliver what the Keynesians thought it would.  Because Keynesian economics (aka demand-side economics) just doesn’t work.  If it did Japan never would have had a Lost Decade to begin with.  For it was Keynesian economics that gave Japan that asset price bubble in the first place.  Which burst and deflated into the Lost Decade.

What Japan needs is a return to classical economic principles.  Focusing more on the supply side.  Lower tax rates and reduce regulation.  Let the market set interest rates.  Restore the policies that introduced ‘Made in Japan’ to the world.  They need to make their capitalism more laissez-faire.  If they do they can create the kind of economic activity that just might be able to support the generation who created the ‘Made in Japan’ label in their retirement.  But you must have robust economic activity.  So robust that lower tax rates can produce greater tax revenue.  The supply-side economics way.

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