This week’s economic data from Japan confirmed, once again, that demographic changes are far more important for the economy than monetary stimulus.
Japan’s premier Abe took power in 2012, promising to end the decline in Japan’s economic growth. He appointed a new Governor for the Bank of Japan, and claimed that his “3 arrows policy” would quickly create an economic boom. But as the chart shows from the Guardian/Zerohedge, Monday’s data showed that Japan has gone back into recession again.
It didn’t take rocket science to forecast this back in April 2013, after Abe had announced his new policies:
“Unfortunately, however, this bold new initiative is also doomed to fail, for one simple reason. As in all developed economies, household consumption accounts for almost 2/3rds of Japan’s GDP. And Japan not only has the oldest population in the world (median age is 45 years). Nearly half of its population are over 50 and so are already in their low-spending years”.
The latest data for Japan’s consumer spending confirms there has been little change since 2013, as the chart shows:
- It highlights how spending declines past the age of 50 in virtually all major areas
- The reason is simple common sense – older people already own most of what they need, and their incomes decline as they move into retirement
Instead, the main result of the stimulus has been to boost Japan’s financial markets, and to devalue the currency. It has been a wonderful ride for the speculators, as the Nikkei Index has soared from 8750 at the end of 2012 to a peak of over 20000 last August. Similarly the value of the yen has fallen over 50% versus the US$ over the same period. The Bank of Japan claimed this would boost inflation by causing import prices to rise, but this theory has also proved incorrect with Japan’s consumer price inflation back at 0% in September.
Unfortunately, Abe’s failed experiment has not been cost free. The Bank of Japan began its stimulus programme in April 2013 by spending Yen 60tn/month, and increased this spend to Yen 80tn/month in October last year, making the total cost roughly equal to $1tn by the end of this year. This debt still has to be repaid, putting a further burden on the economy. And, of course, there is no guarantee that premier Abe will now abandon his failed experiment – as last year, he may simply decide to increase the cost still further.
Even more worrying is that the lesson of the failure is still not recognised by other policymakers. Thus the European Central Bank seems likely to repeat Japan’s mistake of “doubling down” on its own stimulus policy, despite clear evidence that it has also failed to achieve the promised results.