As Japanese Prime Minster Shinzo Abe has turned his country into a petri dish of Keynesian ideas, the trajectory of Japan’s economy has much to teach us about the wisdom of those policies.
And although the warning sirens are blasting at the highest volumes imaginable, few economists can hear the alarm. (A longer version of this article can be found in Euro Pacific Capital’s Global Investor Newsletter.)
Data out this week shows the Japanese economy returning to recession by contracting for the second straight quarter (and three out of the last four quarters). The conclusion reached by the Keynesian apologists is that the benefits of inflation caused by the monetary stimulus have been counteracted, temporarily, by the negative effects of inflation caused by taxes. This tortured logic should be a clear indication that the policies were flawed from the start.
Although the Japanese economy has been in paralysis for more than 20 years, things have gotten worse since December 2012 when Abe began his radical surgery. From the start, his primary goal has been to weaken the yen and create inflation. On that front, he has been a success. The yen has fallen 23% against the dollar and core inflation, which was running slightly negative in 2012, has now been “successfully” pushed up to 3.1% according to the Statistics Bureau of Japan.