Will Abenomics Work?

Last Friday, the Bank of Japan met for the first time since totally revamping its asset purchase program last March. For those of you who don’t remember, here’s a small recap of what newly appointed BOJ Governor Kuroda did during his first interest rate decision:

  • Doubled the monetary base from 135 trillion JPY to 270 trillion JPY by 2015
  • Renamed the asset purchase program as a “quantitative and qualitative” program
  • Set an inflation target of 2% that the central bank must hit within the next two years.
  • Extended the maturity of purchasable bonds to 40 years
  • Double monthly bond purchases to 7 trillion JPY per month.
  • Scrap the No Banknote Rule

All this was done in order to boost the Japanese economy, which has been stuck in a deflationary rut for two decades now.

At Friday’s meeting though, the central bank didn’t make any drastic changes, and merely reiterated that it would keep increasing the monetary base at a pace of 60-70 trillion JPY per year.

Keep in mind that Kuroda is leading the BOJ to do this on behalf of Prime Minister Shinzo Abe, who handpicked Kuroda to take over the top spot at the central bank. The hope is that with Abe’s other policies, such as decreasing corporate taxes, enforcing less rigid workforce rules, and reducing energy prices, the domestic economy will get a nice shot in the arm, which in turn will raise consumer prices and boost Japan out of its deflationary spiral.

The question is though, will Abenomics be enough?

After the numerous recessions and deflationary pressures that have plagued the Japanese economy since the early 1990s, some people are just plain scared to take on any debt. This means that companies are less willing to take risks (i.e. loans), which in turn means they are reluctant to spend on capital investments and hire more staff.

Secondly, there are some economists out there who believe that exports aren’t as important to Japan’s GDP in the past, with exports probably only accounting for less than 15% of total GDP.

Third, the trend of globalization has caused some Japanese companies to position themselves and move operations abroad in order to minimize currency risk and to take advantage of cheaper energy prices.

The implication here is that despite the combination of strategies Abe wishes to implement, we may not see much economic progress.

If these policies aren’t enough to spark inflation, which currently stands at -0.5%, then it’ll be interesting to see what Japanese officials do. Knowing how stubborn the BOJ has been historically though, I wouldn’t be surprised if we see further expansion of the asset purchase program later this year. After all, as the old saying goes, if you try and fail, try harder!

Is it really hard to believe that Kuroda would go for even more monthly purchases? Will this be enough to boost USD/JPY past the 100.00 mark? Only time will tell my forex friends!


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  • PipHunterD

    the one thing you can count on when politics over-rides economics is that no matter how bad the plan, they will push it even harder if they can show one small thread in a virtual non existent silver lining just to say “I told you so!” Meanwhile everything else explodes (or implodes) around them.