Uncertainty is sweeping across the globe, as many regions experience both remarkable highs and unsettling lows. As summer officially begins, Americans eagerly anticipated Independence Day festivities, but simultaneously, Cairo grappled with a military coup.
With tanks rolling down the streets, the sunset marked not just the end of the day in Cairo, but also the downfall of Mohamed Morsi’s presidency. Soon after, the sky was illuminated by fireworks, signaling a pivotal moment in Egypt’s history.
What does this upheaval signify? The answers are as ambiguous as ever. Some suggest that the unrest in Egypt contributed to pushing oil prices above $102, which seems as plausible an explanation as any.
With the U.S. markets closed for the holiday, we turned our gaze eastward. In Japan, we observed the Nikkei 225 reviving, recovering 12% after plummeting 20% from mid-May to mid-June. What does this mean for Japan’s economy?
Is the recent sell-off a mere overreaction? Will the current surge endure?
Such uncertainties are all part of the equation when evaluating Abenomics.
Taking Abenomics to the Next Level
Shinzo Abe, Japan’s Prime Minister since December 2012, has championed a policy of aggressive monetary easing, which includes extensive money printing and promoting a weaker yen. He believes that these strategies, collectively termed “Abenomics”, will stimulate exports and revitalize Japan’s economy, which has been stagnant for two decades.
Now, there are signs that Abenomics may be poised for further advancement.
“The campaign for the parliamentary election on July 21 kicked off on Thursday, with opinion polls predicting substantial gains for Prime Minister Shinzo Abe and his economic revival agenda,” reported The New York Times.
The election will decide half of the upper house of Parliament, where Abe’s main opponents currently hold power. Following a decisive victory in December for the lower house of Parliament, the Liberal Democrats, Abe’s conservative governing party, appear set to replicate that success in the upper house. Such a win would allow him to become the first in years to break the cycle of swift leadership changes in Japan.
“With control over both parliamentary houses, Mr. Abe would have significantly more freedom to advance Abenomics, a combination of monetary stimulus, government spending, and promised economic reforms to lift Japan from prolonged deflation.”
“The enthusiasm for Abenomics has driven the Tokyo stock market up by one-third this year, and Japan’s aggressive monetary easing has bolstered its key exports by diminishing the yen’s value against the dollar and other currencies. As a result, Japan’s economy has emerged as the fastest-growing among the G7 industrialized nations.”
Programs to Control the Uncontrollable
Despite these positive developments, Japan stands just one crisis away from potential catastrophe. The nation’s gross debt exceeds 240% of GDP, making growth a daunting strategy for alleviation. Raising taxes to eliminate debt would likely stall economic recovery entirely.
But politics often favors more convenient solutions. Further currency devaluation remains a tangible option. Perhaps, devaluing the currency could serve as a mechanism to erode the debt burden…
“Japan’s debt appears overwhelming partly because, due to deflation, nominal GDP has stagnated at levels last seen in 1990, resulting in diminished tax revenue,” explains the Financial Times. “With 2% inflation and real growth of 1-2%, Japan could achieve nominal growth of 3-4%. This would make the debt situation appear somewhat more manageable, suggesting that Japan might benefit more from inflating its way out of debt rather than implementing cuts or contraction.”
Nonetheless, such financial experiments rarely unfold as planned. They tend to create distortions, misallocations, and unwanted financial bubbles in unforeseen areas, often exacerbating existing problems.
Yet, we eagerly anticipate the unfolding of the Abenomics initiative. It promises not only to offer insights into what may lie ahead for the United States if it continues down its path of unsustainable debt growth, but also to reveal the limitations of humanity’s attempts to master the uncontrollable.
Sincerely,
MN Gordon
for Economic Prism
Return from Programs to Control the Uncontrollable to Economic Prism
