I saw a headline this week that actually made me laugh out loud: “Japan’s economy makes surprise fall into recession.”
Surprise? Really?
Japanese GDP shrank by 1.6% last quarter after shrinking by 7.3% in the second quarter. The culprit? Japanese consumer spending, which was much weaker than expected. Consumer spending makes up about 60% of Japanese gross domestic product, and Japanese consumers have snapped their wallets shut following a sales tax hike earlier this year.
The only surprise here should be that economists didn’t see this coming. Japan has seen GDP fall in three of the past four quarters. The only quarter that saw growth — the first quarter of 2014 — was an outlier skewed by the pending sales tax hike. Japanese shoppers went on a spending spree in the first quarter in order to avoid the new sales tax.
The media is calling this a failure of Abenomics, and it is — sort of. But I would argue it goes much deeper than that. The bigger failure is that economists thought Abenomics ever had any chance of success. Of the 59 quarters that have passed since 2000, the Japanese economy spent 21 of them shrinking.
And in many of the quarters that had GDP growth, the “growth” is mostly a result of poor comps from the previous year. It’s not hard to show “growth” when your previous year’s results were awful.
A little quantitative easing (OK, a lot of quantitative easing in the case of Abenomics) is not going fix an economy this broken. Hey, I’ll give credit to Prime Minister Shinzo Abe and to Bank of Japan Governor Haruhiko Kuroda for making the effort; at current exchange rates, Japan’s quantitative easing program is about three times bigger than Ben Bernanke and Janet Yellen’s “QE infinity” adjusted for the size of Japan’s economy. Kuroda is buying bonds at a rate equal to 16% of Japan’s entire economy, every year, until further notice.
