Nomura economist Richard Yoo, who’s produced a lot of really good analysis of the Japanese economy over the past decade, thinks the Abenomics honeymoon is over.
Basically, despite the Bank of Japan injecting enormous liquidity into the Japanese financial system through their 20th something iteration of QE, private sector demand for credit has barely budged.
The whole point of QE is to keep interest rates low, but if the velocity of money is low then that monetary base is not moving around the economy spreading fairy dust in the form of investment, consumption and job creation.
There is an interesting Bank of Japan paper that explains the low velocity of money since the Japanese economy went into decline over 20 years ago.
In order for Abenomics to be successful three things have to happen:
- Overseas investors have to stick around
- Private sector credit demand has to increase
- All of the supply-side reforms he wants to implement can’t be held up
Because all of these three are unlikely – even though there’s reasonable evidence to suggest the Nikkei 225 at 15,000 wouldn’t be unreasonable, the Abenomics experiment could soon be filed under “Stuff Japan Tried And Failed Dismally At”.
It’s not their economy’s first time at the QE rodeo – and the jitters it is sending through their financial markets are something to be concerned about.