Today’s BoJ decision highlights the first serious doubt about the idea of Abenomics. 8 years of this policy left Japan with exactly the same structural problems, nationalized economy and manipulated markets. Was it worth it?
The idea of Abenomics was simple – pour massive liquidity on the economy and markets, weakening the currency, promoting exports and driving company profits and assets prices. Except it didn’t work. Market consequences of this policy are the only major lasting outputs as the yen remains significantly weaker and equity prices are elevated. But it’s not the market forces that are driving them but pure manipulation – the BoJ has surpassed the state pension fund as the largest stockholder in Japan and it controls all interest rates via YCC (interest rate is one the most important price in the free market economy deciding over capital allocation).
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BoJ is now the largest shareholder in Japan at over 9% of GDP! Source: visualcapitalist.com
But it did not help promote economic growth. The only pick-up you can see in the early phase of Abenomics was through massive purchases ahead of well communicated sales tax hike. Even massive JPY depreciation did little to boost exports for longer and as you can see the Japanese growth underperformed even weak pre-GFC standards.
Abenomics did nothing to promote sustainable growth. Source: Macrobond, XTB Research
Nor the BoJ was able to lift inflation. It was unable to meet a modest 1% inflation goal for years so it decided to… increase it to 2%! Sounds reasonable, doesn’t it? It was met only for a while as inflation rose when the sales tax was increased and obviously it tumbled back to 0% afterwards.
Increasing inflation goal had no effect on actual inflation. Source: Macrobond, XTB Research
So what’s now? There is no easy way out. Even if the BoJ understands the position it had put itself in, they cannot withdraw this policy overnight as that would crash markets and drag the economy into recession. Getting out of it will be long and painful. For political gains of Mr. Shinzo Abe the BoJ demonstrated how not to conduct monetary policy and yet it’s hard to resist an impression that other banks are following it.
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