The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy

CHAPTER 4 The Great Potential of Abenomics

Abenomics, the colloquial name for the economic policy of the Abe administration in Japan, consists of three “arrows”—(1) bold monetary accommodation by the Bank of Japan (BOJ), (2) flexible fiscal stimulus, and (3) structural reforms. After being launched late in 2012, Abenomics enjoyed a five-month honeymoon with the markets, helped by favorable coincidences that dramatically changed the economic landscape. The markets' initial enthusiasm was based on the prospect of bold quantitative easing (QE) by the central bank. Although this honeymoon ended in May 2013, the policy still has great potential, and if that can be properly leveraged, Japan should be able to put the long balance sheet recession and its aftereffects behind it for good.

First, the honeymoon: The markets began to pay attention to Abenomics when Shinzo Abe was elected leader of the Liberal Democratic Party (LDP) and then led the party to victory in the general election on December 16, 2012. That kicked off a ferocious decline in the yen and a corresponding rise in the Japanese stock market. Share prices had risen 80 percent by May 2013, and the yen dropped by more than 20 percent against the dollar. This dramatic stock market rally and currency depreciation produced a major change in the Japanese economic environment.

Some said these developments were proof Abenomics was working, but closer examination suggests they were actually due to an extremely fortunate combination ...