Too quick to say that Abenomics has failed Japan

Reuters

Japan's Prime Minister Shinzo Abe and Myanmar's President Thein Sein toast during lunch at the Myanmar International Convention Center in Naypyitaw, May 26, 2013.

David Li would appear to be too hasty to dismiss Japan's bold new economic policy ("Abenomics will only damage Japan's neighbours", May 22). In particular, it would seem far too early for him to conclude that Abenomics will not extricate Japan from its deflationary mire or to surmise that it will fail to jumpstart the Japanese economy.

In pointing to the fact that Japanese inflation is yet to show any marked pick-up, Mr. Li glosses over the dramatic change that has occurred in long-run Japanese inflationary expectations since the launch of Abenomics. This change is reflected in all the standard measures of such expectations. As an example, since the beginning of this year, inflation expectations as measured by the difference between five-year Japanese Treasury Inflation-Protected Securities and JGBs has increased from no inflation to an expected inflation rate of more than 1¾ per cent a year over the next five years.

Mr. Li is most likely correct to expect that Japan's weaker currency policy will get pushback from its Asian neighbours. However, the same would not appear to be the case with Japan's US and European trade partners. At the recent Group of Eight meeting, Japan was effectively given the green light to continue with its policy of aggressive quantitative easing that has seen further significant yen depreciation. Considering that it generally takes at least a year for the full impact of a currency depreciation to be felt, one has to expect that, in the months ahead, the Japanese economy will get a big boost from the 25 per cent effective Japanese yen depreciation to date.

 

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
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